Cost of Staff Benefits to Soar
By Elaine O’Regan, Sunday Business Post
The new budget has foisted PRSI and tax levies totalling 10.75 per cent on all benefits provided by employers with the exception of those previously exempt from tax.
The additional cost will primarily affect blue chip employers ‘of choice’ who offer strong benefits packages, according to Peter Ryan of RA Consulting.
“A lot of work is currently being done to find out how exactly this will work logistically with a view to the changes taking effect from January 2004,” said Ryan.
“While the detail associated with these changes has yet to be announced, employers can expect this additional cost to arise where they provide company cars, petrol cards, health insurance, subsidised canteens and club membership.”
Some may regard these changes as a positive move toward a more thorough broadening of the tax base, but it does not bode well for employee taxation strategies in the future, according to Ken O’Brien of PricewaterhouseCoopers.
The introduction of PRSI on benefits in this budget will affect the employer in all cases, but it does not make sense that budgetary changes should, in isolation, attack employers, said O’Brien.
“The likelihood is that the next budget will place some of the burden on the better-paid employees who would typically get these benefits.”
The tax changes introduced in this budget may prompt employers to cut down on staff benefits in the next few months.
This would negatively affect employees accustomed to generous benefits packages, said O’Brien.
The introduction of additional costs may also cause employers to question more closely the validity of fixed benefits packages as a cost-effective staff attraction and retention tool, said Ryan.
“As things stand, benefits are sometimes overlooked by employees,” he said.
“Because people don’t see the benefit in their pay cheque at the end of the month and it doesn’t increase their discretionary spend, they tend to take it for granted. This is exacerbated by the fact that benefits are not really promoted within organisations.”
Benefits represent a significant investment, comprising an estimated 20 per cent of the total remuneration package on offer to most Irish employees. The introduction of taxation in this area, for the first time ever, will significantly increase the cost of this investment for employers across the board.
The flexible benefit option could now find favour with more employers looking for ways to cut down on potential tax costs, said O’Brien.
“Flexible benefits packages include a range of traditional benefits and cash options, and they can be very cost-effective. Some of the benefits that would constitute these flexible packages are not subject to the introduction of the PRSI and tax levies,” he said.
Flexible benefit arrangements enable employees to choose benefit combinations which are of value to them, based on a variety of factors, including age and their own personal circumstances.
As part of a flexible benefits packages, employers will typically offer employees a combination of — for example — share options, cash bonuses, club membership and childcare facilities, as well as ‘non-taxable’ benefits such as flexible working arrangements.
“A unit or currency value may be applied to existing benefits, and employees are typically provided with the option, for example, to ‘sell’ extra holidays and ‘purchase’ increased health insurance, or ‘sell’ company cars and ‘purchase’ extra pension contributions,” said Ryan.
Although the introduction of flexible benefits packages may not cut down on tax costs in all cases, they could prove a more effective option for employers who want to get a ‘better return’ on their investment in employee benefits, according to Ryan.
“Flexible benefits allow people to more easily understand the value associated with the benefits they are receiving because they actively engage in the benefits process,” he said.
The cost of providing employee benefits is set to rise significantly when changes introduced in the new budget come into effect in 2004.