Tax and NI Implications
Under some old case law (Heaton v Bell, 1969) where there is a cash alternative to a benefit, tax may be payable on the cash amount. The strict, theoretical position is that:
§ if the employer offers pay and the employee chooses the form in which this is delivered, tax is payable on the cash amount;
§ if the employer and the employee negotiate package changes, then tax is based on the actual cash and benefits received.
In most flexible benefits plans tax (and if appropriate NI) is payable on the actual cash and benefits received. This is easily achievable, provided the plan is set up correctly.
At one time the opportunities for tax and NI savings through flex plans were material but this is no longer a major input to plan design. At the time of writing, some benefits have income tax and/or NI privileges, including pensions, some forms of childcare assistance and computer leasing.
Offering flexible benefits does not suspend the normal implications of employment law. In general, flex does not, of itself, introduce new issues beyond those normally faced in operating pay and benefits programmes. Specific points to note are as follows:
§ If changes are made to terms and conditions of employment, these must either be an unambiguous improvement or will require the consent of employees.
§ Under TUPE, any pre-existing rights to flexible benefits are transferred along with other contractual rights.
§ Where deductions are being made to the earnings of individuals, written consent should be obtained to these deductions.
§ The employer should reserve the right to make alterations to the flex plan in the future (some changes might be forced by reasons beyond its control).
The part pensions can play in a flexible benefits programme was considered earlier in this chapter. However, where the flex plan leads to an individual's cash earnings changing, this can have knock-on pensions implications.
The normal approach taken is to base pensions on notional salaries. In other words, any impact on earnings caused by trading up/down is ignored for pensions purposes. However, this will require careful communications, changes to pension scheme rules and possibly changes to insurance policies.
Similar issues apply to life assurance, permanent health insurance (long-term disability income schemes) and other programmes linked to salary.
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