The most important benefit to employees and the biggest expense for employers is pension provision. Young employees have traditionally shown little interest in saving for the future. This led the government to compel employers to provide pensions through the autoenrollment scheme. Private medical insurance comes in at a close second in importance, with disability following it.
Howden Employee Benefits & Wellbeing
Market and Benchmark Insight Report for the UK – 2022
There are very few mandated benefits in the United Kingdom. Employers make choices about benefit provision based on competitive market practice and doing the ‘right’ thing. Surprisingly, the cost of benefits provision is very competitive and is usually 14% of payroll.
Mandatory employee benefits in the UK include retirement, holiday pay, maternity/paternity pay (companies often exceed the statutory limit as part of a comprehensive benefits offer), and sick pay. Supplementary employee benefits in the UK include life assurance, income protection (long-term disability) GIP, critical illness insurance, private medical insurance, dental insurance, the health cash plan, employee assistance programs and virtual GP services, and employer-sponsored retirement. Employee perks include company cars, season-ticket loans, childcare vouchers, biking to work, gymnasiums, and workplace canteens.
Mandatory Employee Benefits in the United Kingdom
Pensions are a mandatory benefit in the UK and are subject to legislation. Employers must comply with legislation and auto-enroll eligible employees into an appropriate pension. Pensions auto-enrollment means employers are required to provide a minimum level of pension provision for employees. The minimum contribution rate for workplace pension schemes is currently 8% of ‘qualifying earnings’ (as defined in the legislation). At least 3% of this must be paid by the employer. However, pensions are considered a key benefit in the UK, and many employers contribute significantly above the minimum level.
Employees are able to contribute more, but in the UK there are maximum annual allowances that must be considered.
When designing a UK pension scheme care needs to be taken in five main areas:
- Contributions – what level of contributions will be competitive and attract the right talent?
- Contribution method – the most tax-efficient method of deducting contributions is Salary Exchange (also known as Salary Sacrifice) as it gives maximum reliefs in terms of tax and national insurance, to the employee and employer.
- Carrier selection – selecting the best supplier based on proposition delivery, terms, employee engagement support, and financial strength.
- Default fund – The pension provider will offer a specific default fund for enrolment which is run under strict governance criteria. However, some employers may prefer to select an alternative default fund for enrolment, based on their own considerations and requirements relating to performance, environmental and social governance.
- Employee support – how is the scheme communicated and what specialist support are they provided with?
In the UK, the National Health Service (NHS) is a government-funded healthcare system that everyone living in the UK can use without being asked to pay the full cost of the service. This includes
- visiting a doctor for medical advice, diagnosis, or treatment
- treatment at a hospital if you are unwell or injured
- Getting emergency help from healthcare professionals working in the ambulance services if you have serious or life-threatening injuries or health problems – this might include being transported to the hospital
The NHS is ‘publicly funded’, with most of the money collected through UK residents paying tax. In light of the current pressures on the NHS and increased waiting times, increasing numbers of employers are now considering private healthcare options to ensure that employees can get fast access to healthcare advice and treatment when they need it most.
All workers who work a 5-day week are legally entitled to receive at least 28 days’ paid annual leave a year. This is the equivalent of 5.6 weeks of holiday (known as statutory leave entitlement or annual leave). An employer can include public holidays as part of statutory annual leave.
It is common for UK employers to provide greater paid holidays than the statutory minimum. In addition, many employers will offer employees the option of increasing their holiday entitlement by ‘buying’ extra days as part of a flexible benefits arrangement.
Full rules can be found here.
The government requires employers to provide a minimum level of Statutory Sick Pay – however, most employers voluntarily top up this minimum benefit by offering contractual sick pay benefits. A common approach here is to pay some sick pay (2 – 4 weeks for example) at full pay and then reduce payments. Some industries are very generous whereas other sectors provide no supplemental sick pay.
Supplementary Employee Benefits
These plans can be established from 3 employees upwards and need to be set up under an appropriate trust. Setting up the correct trust is vital otherwise substantial tax charges will apply. Depending upon the type of scheme and trust selected, employers will need to register the scheme with HMRC either at inception or in the event of a claim. If a policy has fewer than, typically, 20 employees covered, the premiums may need to be set on a single rate rather than a unit-rated basis. Otherwise, the cost is on a flat rate basis.
Income Protection (Long-Term Disability) GIP
Income protection plans can be established from 3 employees upwards and are easier to set up than Life Assurance because no trust is required. Cover will not apply to any employee not actively at work when the policy commences. Claimants typically remain employed so the employer’s pension contributions and National Insurance still apply. These elements can be insured, and employers will need to consider whether to include these costs.
Typically, benefits are funded by the employer, but in a flexible environment, they may be topped up by the employee. It is not tax efficient to salary sacrifice employee contributions as both premiums and benefits will be taxable.
Critical Illness Insurance (CIC)
This type of insurance provides a lump sum payment on the diagnosis of a specific condition, such as cancer, heart attack, or stroke. Policies typically cover anything up to 30 or 40 conditions. Most commonly the benefit is provided as a voluntary benefit funded by employees. Some employers provide employer-funded CIC to their most senior employees.
Private Medical Insurance (PMI)
With this insurance, smaller schemes might have a restriction applied in respect of covering pre-existing conditions. Generally, insurers will quote on a Medical History Disregarded (MHD) basis for a minimum of 20 employees. However, it is possible that schemes can be set up on this basis from 1 employee upwards. Company-paid premiums are subject to Benefit in Kind (‘P11D’) taxation, and most corporate schemes are “fully insured” with premiums set annually. In addition, a growing number of Trusts are in place for employers with over 1,000 employees and hybrid Trusts.
These policies are quite straightforward to set up in the UK and the minimum criteria is normally two employees. Policies can be set up on a company-paid or employee-paid basis, and monthly costs typically range from £10 to £50 per member depending on the level of cover required.
Health Cash Plan
This is a corporate policy to help cover or contribute to everyday healthcare costs that aren’t always covered by Private Medical Insurance. The employee pays for the cost initially and then claims back the cost subject to policy cover and limits. The minimum number of lives for a corporate policy is three employees, and monthly costs range from £5 to £50 per member depending on the level of cover required.
Employee Assistance Programs and Virtual GP Services
Most employers offer an EAP as a standalone benefit or included in the Income Protection benefit. Online virtual GP services have become increasingly popular as a convenient way for employees to access healthcare advice and support. This is most often provided as a value-added service as part of a PMI and GIP benefit.
Implementation periods for retirement plans typically take between 1 and 3 months. This scheme must be available to employees from ‘day one’ of employment, so it must be ready and, for start-ups, in place ahead of the first employee joining date. Also, a UK bank account is mandatory for the processing of contributions.
Small numbers of employees can be provided with company-financed cars and/or fuel, or a car allowance in lieu. Company cars are not as popular in recent years as the government taxes this benefit heavily. However, in a work environment where employees travel in business, you may see either company cars provided or car allowance paid.
Season Ticket Loan
Common for commuters. The employer loans the employee money to buy a discounted annual season ticket and reclaims the money every month from their salary.
Tax-free Childcare and Childcare Vouchers
The government’s tax-free childcare program replaced Childcare Vouchers in 2018. Vouchers are no longer available unless an employee is already enrolled in it and the employer offers it.
Tax-free childcare offers up to £2,000 a year per child towards childcare costs, including nursery, childminder, and wrap-around care. Learn more
Bike to Work
Another tax-efficient scheme to encourage commuting by bicycle. Employees can save up to 43% tax on the purchase of a new bike. Essentially, the employer buys the bike, and the employee rents it for a specified period with the option to buy it at a heavily reduced rate at the end of the rental term.
There is also an increase in well-being allowances that allow employees to do any sports activity rather than just be allowed access to a gym benefit.
Common with larger employers and can be highly valued. Food is provided at a discounted rate, this could include breakfast, lunch, and dinner.
Related Government Websites
Jobcentre Plus of the Department for Work and Pensions
This information about employee benefits in the UK is provided by Howden, Asinta’s employee benefits consulting partner in the UK.