Employee benefits: the cost-effective alternative to a pay rise

It’s not uncommon for employees to expect or request pay rises, particularly when times are hard. The cost-of-living crisis has affected businesses and individuals alike, and a challenge that many employers are facing is the inability to provide pay increases – or sufficient pay increases – due to budgetary constraints. This is therefore making it harder for many employers to attract and retain talent, as money is a key consideration for most. With that being said, attitudes to remuneration are changing, and the traditional ‘pay package’ where salary is the sole focus is gradually being phased out in favour of the more holistic ‘benefits package’.

Over the past decade, there has been a gradual shift in employee expectations, and this shift was accelerated following the pandemic. The WTW 2023 Benefits Trends Survey found that between 2021 and 2023, a growing number of employers across the UK are utilising employee benefits to drive attraction and retention. This shift has been fuelled by the increasing emphasis on physical health and wellbeing, mental health and growing NHS waiting lists. And of course – people talk, so as employee benefits grow in prevalence, they become part of the remuneration conversation.

The employee benefit offering is broad and varied, and it can be a challenge for employers to know which benefits their employees may value the most. The results of the WTW 2022 Global Benefits Attitude Survey outlined that in order of importance to employees, the most valued employee benefits in the UK include:

• Long term finances, specifically workplace pensions
• Flexible working e.g. hybrid working
• Training & development
• Health benefits e.g. Group Life Insurance & Private Medical Insurance
• Mental health benefits e.g. An Employee Assistance Programme

Whilst priorities can of course differ across different demographics and industries, this list reveals a significant opportunity for employers.

In the vast majority of cases, an increase in gross pay will result in an increase in Income Tax and National Insurance. Those repaying a student loan will also likely see an increase in their monthly repayments. Despite these factors, a pay rise is still generally seen as a positive – if the increase is significant enough to offset the additional tax.

Many employee benefits on the other hand, such as an employer pension contribution increase, or Group Life Assurance, are provided at no cost to the employee. A benefit in kind such as Private Medical Insurance can be fully or partially funded by the employer, but even if the employee incurs a cost, they can still financially benefit in the long run if various health costs are covered. Pension salary exchange (also known as salary sacrifice), is a benefit that can increase employee take home pay. Workplace funded discounts on various expenses such as dental care and gym memberships can result in an indirect increase in disposable income.

Generally speaking, it will most likely cost an employer less to provide an employee benefit to staff than it would be to increase their pay. Some employers may launch or improve an employee benefit to supplement a smaller pay rise. And because some employee benefits such as pension salary exchange and Group Life Assurance will reduce tax for employers, this reduced tax can be used to offset the cost of an employee benefit.

If you’d like to know more about using employee benefits to enhance your remuneration package contact Michael Boateng, Workplace Benefits Consultant via email at michael.boateng@albertgoodman.co.uk or telephone 07742 073 517.