Want to help with employees' finances? Consider a benevolent fund

Out-Law News | 10 Mar 2022 | 10:29 am |

Chris Thomas tells HRNews how UK employers can support employees struggling financially setting up a hardship fund
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  • Transcript

    There is a cost of living crisis in the UK so what can businesses do to help employees, aside from the obvious pay rise? That is the question being asked this week by Personnel Today and it’s one being asked by a number of our clients too.

    The background to this is, of course, the soaring cost of living meaning employees’ finances are being squeezed like never before. Inflation is predicted to hit 7% in April and that figure is set to rise further given the war in Ukraine and economic sanctions on Russia, sanctions which will affect the supply of oil and gas to Europe, worsening the energy crisis, and driving up the cost of living even further.

    The article recognises that employers can only offer so much in the way of pay rises and so it looks at a variety of alternatives to help employees’ wages go further. Tim Kellett is a director at reward management consultancy Paydata which has been getting feedback from HR professionals. He says many organisations have offered financial wellbeing workshops for staff and have amplified their communication of existing benefits such as season ticket loans and interest-free loans. Firms are also promoting flexible and hybrid working opportunities which can help cut employees’ commuting costs. Also, recognising the impact that financial worries can have on employees’ mental health and wellbeing, Kellett says some firms are offering private healthcare, health insurance, and increased support for lifestyle benefits such as gym memberships and discount codes.

    The article is a long one which goes on to look in some detail at pension holidays and salary sacrifice schemes both of which can help, albeit in very different ways. Surprisingly though, it doesn’t mention an option which a number of our clients have been looking at, namely setting up an employee benevolent fund, or hardship fund. This is a scheme designed to help specific categories of beneficiaries who are facing increased financial hardship including employees, former employees, pensioners and their families and dependants. It’s not a new idea - there are around 3,000 benevolent funds currently operating in the UK of which the vast majority are charities, although there are alternatives. However, if you are going to go down this route be aware there are lots of issues to consider - employment law, consumer credit and, of course, tax. To explain, on the line, Chris Thomas:

    Chris Thomas: “So I suppose the first question is what form would, or should, a benevolent or hardship fund take? There are a number of options there. So, on a very simple level, it could just involve making grants on an ad hoc basis. You might want a more formalised scheme, perhaps with some sort of criteria under which employees can apply. You might want to think about loans rather than simple outright grants. If you're looking at something that's perhaps a bit of a longer term proposition, rather than just a sort of a short term response to the pandemic, you could consider setting up a charity which has the benefit of providing benefits more tax efficiently than the other routes do and is particularly suitable, I guess, if this is something you can you want to be doing as a longer term objective You could even think about using an existing Employee Benefit Trust if you've got a surplus cash available in it. So there are a number of ways in which this could be done but the key thing in any case is to think about what the tax consequence will be. So if it's a simple cash grant that's going to be fully taxable, fully NI-able. If it's a loan then usually that will be tax neutral because there's an exemption from the benefit-in-kind-charge if the loan is under £10,000, but you just need to be a little bit careful, particularly if the loan is waived, that could have tax complicated consequences. The other thing about loans is it can get you into consumer credit problems, which is obviously not a tax issue but it is something we're aware of from discussion with colleagues - that can be quite complicated and involve getting authorisations if you don't have them, so it may not be something you want to kind of go with in practice. I mentioned setting up a charity as a possible option if it's a longer term scheme and, as I said, the key advantage to that is it should then be possible to get support to employees without any tax liability, which obviously is good. It can also have optical advantages and it also allows for other employees to be able to contribute to it if that's something that you might want to do as part of your charitable giving proposition. On the other hand, it does involve some additional governance considerations, some extra legal steps, you do have to register with The Charity Commission and there is a process and some additional considerations would have to be thought about, although it might be possible to start providing benefit spending getting the charity actually formally registered, if you wanted to do that, but that's a little bit more complicated, but again it's something that we have looked at with some clients. So as I say, there’s a whole menu of things that you could do and it's very much a question of what your priorities are, how simply you want to keep, but it's something, as I say, that we have been helping clients with quite a bit. Just one final point to note is that we are seeing, in some cases, people wanting to make payments to family members of employees who are deceased, whether in relation to the COVID-19 or the other reasons. Just a note of caution that if you're doing that as an ad hoc thing, i.e. not under a tax-approved death in service scheme, and insurance-backed scheme, if you're just doing an ad hoc basis that is likely, unfortunately, to have tax implications so just be aware of that and seek advice before committing or going ahead.”

    Chris has written in detail about the various issues that need to be considered before putting in place this kind of financial support for employees.  His Outlaw Guide is called ‘Setting up an employee benevolent fund in the UK’ and is available from the Outlaw website.