Top tips to cut staff costs before considering redundancies
Employee costs are the most expensive part of any business’s budget. Inez Anderson, an employment tax director at accountancy and financial services firm, Smith & Williamson, provides her top tips on how to reduce these costs without making redundancies.
Inez said: “In the current climate, businesses are looking to save money and, as we have seen, many people have lost their jobs. There are some steps that businesses can take to reduce what is often their greatest cost, without cutting jobs.”
One option is using salary sacrifice arrangements to provide benefits. Under such arrangements, salary, which is subject to tax and national insurance can be sacrificed in exchange for benefits the employee was previously paying for out of after-tax income. The greatest savings are achieved when the benefits are tax and social security exempt. Typical examples are childcare vouchers, pension contributions, car park facilities and staff canteens. This reduces the cash salary on which the employee pays tax and on which both the business and the employee pay National Insurance contributions. The net result is that the business and employee save national insurance and the employee saves the tax cost on the salary sacrificed as the benefit is being bought out of gross salary, not net.
Inez explains, “To be tax effective a salary sacrifice must take the form of a written amendment to the employee’s contract, be made in advance of the salary entitlement crystalising and not be capable of being changed back at short notice. It’s also important to watch what impact, if any, there may be on entitlement to state pension, state benefits such as maternity and sickness and child tax credits. Salary sacrifice in exchange for additional pension contributions for very high earners may not produce the desired results in some circumstances and professional advice should be taken if it is contemplated.”
For companies that already have flexible benefit schemes in place it may be appropriate to stop employees selling holiday back to the business as this is a cash cost to the company. Encourage staff who are not busy to purchase additional holiday, ie, take extra unpaid leave.
Whilst thousands of employers have set up salary sacrifice schemes which provide a genuine win-win situation for both parties, firms should take professional advice to make sure the arrangement is properly organised.
Review existing schemes
Ensure that you are getting the best rate for staff benefits such as life and other insurance-based benefits, especially in the light of recent age discrimination legislation. With an older workforce permanent health insurance and private medical insurance are particularly expensive.
If redundancies are inevitable
If you do have to make some redundancies and are negotiating it is important to remember that the first £30,000 is not always tax free and also that more than £30,000 could be exempt from NI.
Inez said, “The employment law aspects of termination arrangements can be complex and we often find that businesses focus on these and forget about the tax and national insurance issues. Careful planning and consideration should be given to these areas as there is the potential for substantial savings to be achieved.”
There are lots of opportunities for employers of all sizes to reduce employment costs.
For further information, contact:
Inez Anderson, Employment Tax and Incentives director at Smith & Williamson
0207 131 4919