In the UK, it’s common for employers to use a payroll deduction scheme, in which tax, insurance, and extra perks and benefits are charged out of an employee’s monthly salary. As a convenient way to make sure each of these costs are covered, many employees also favour this approach – which benefits employers in turn. But, what exactly are the pros and cons of these kinds of schemes?
Here, we share some of the benefits and drawbacks to note if you’re considering implementing this practice into your payroll.
Pros for employers
Perhaps one of the most significant benefits of adopting a payroll deduction scheme for employers is that they can take advantage of lower payroll tax and National Insurance Contributions. By deducting pension contributions through a salary sacrifice scheme, employers could save £345 per employee each year. Other benefits include:
Simplified administration
Payroll deductions can automate processes such as benefits contributions, tax payments, or loan repayments. This means that payroll administrators don’t have to work the contributions out manually, lowering the risk of errors.
Enhanced employee retention
Many employees like the convenience that comes with having payments automatically deducted. It’s also possible to enjoy additional perks and benefits, all of which boost employee retention.
Improved financial planning
Employers are able to anticipate recurring deductions, which can result in better financial forecasting.
Cons for employers
Despite the number of advantages to implementing a payroll deduction scheme, there are some drawbacks:
Administrative costs
Setting up and maintaining a payroll deduction system may incur additional costs – it may not be an affordable option for smaller businesses.
Liability risks
Employers have to be careful that deductions aren’t mishandled, so as not to face compliance issues or legal consequences.
Pros for employees
Most employees enjoy the convenience, assurance and various benefits and perks that come with having payments automatically deducted.
Convenience
With essential payments automatically taken from employees’ payslips each month, they don’t have to worry about making them themselves, reducing the likelihood of missed or late payments.
Access to benefits
It’s common for employers to offer benefits like insurance or pension plans through workplace reductions, which are often at lower group rates.
Budgeting aid
Payroll deductions can help employees to manage their payments more effectively, ensuring they’re able to prioritise their essential payments, and avoid falling into debt. It can potentially reduce the need for loans and other types of credit, and may ensure employees are less susceptible to loan fraud and other financial scams.
Cons for employees
There are some drawbacks for employees, but these are generally outweighed by the advantages. While the following cons might be something to consider, allowing employees to either opt in or opt out of these deductions (outside of those that are required by law) they can then weigh up the pros and cons for themselves.
Reduced take-home pay
While automatic deductions may benefit employees, they do result in lower monthly take-home pay, which can require some adjustment.
Limited flexibility
Deductions are recurring, meaning that employees generally can’t pick and choose which months they pay into their various pots – for example their pensions. Some people may feel restricted by these automatic deductions.
Implementing a payroll deduction scheme
To sum up, payroll deduction schemes are popular among both employers and employees. However, whether you choose to implement one – and how you choose to implement it – will depend on the size of your organisation, your operational needs, and your company’s financial goals.
This blog post was written for HRTech247 by Athena Addison.
