With the rising cost of living putting pressure on employees and businesses alike, employers need to look beyond annual salary increases and consider how remuneration packages can be structured more effectively.
What Do the Proposed Changes Mean?
The Bill proposes increasing certain remuneration thresholds used in determining eligibility for specific tax exemptions and benefits. For example, the remuneration proxy threshold used in certain education assistance provisions would increase from R600,000 to R900,000. Other thresholds relating to employer-provided benefits, including certain residential accommodation arrangements, are also proposed to increase.
These changes could affect how certain employee benefits are assessed for tax purposes, providing some breathing room as tax will kick in at a higher threshold. However, the impact will depend on the specific benefit, the employee’s circumstances and the applicable legislation. The proposals should also be distinguished from legislation that has been formally enacted.
Why Should Employers Review Their Remuneration Packages?
Many employers focus primarily on the total cost of employment or the annual salary increase. However, two employees with similar total remuneration may have very different financial needs and priorities.
A well-designed remuneration package can give employees greater flexibility to allocate their total package between suitable benefits to make use of the amended thresholds, within the employer’s policies and the applicable tax and employment legislation.
Depending on the employer’s structure and the benefits available, these options may include retirement fund contributions, medical aid, risk benefits, qualifying education assistance and other appropriate remuneration components.
The objective is not simply to offer more benefits. It is to understand how the different components work together, what they cost the employer, how they affect the employee’s take-home pay and whether the arrangement complies with the relevant legislation.
Flexible Benefits: A Practical Solution
Flexible benefits can help employers create remuneration packages that better reflect employees’ individual needs, while maintaining control over the overall employment cost.
For example, one employee may place greater value on retirement savings, while another may prioritise medical aid or other benefits. A flexible structure can help employees make informed choices within the options offered by their employer.
However, flexibility must be supported by proper planning. Employers should not assume that changing the composition of a package will automatically result in tax savings or increased take-home pay. Each option needs to be assessed carefully, taking account of the relevant tax treatment, payroll implications, employment contracts and company policies.
Where Should Employers Start?
Employers should consider conducting a remuneration structure review to assess whether their current arrangements remain appropriate and effective. This should include:
- Reviewing existing packages: Understanding how remuneration is currently structured and identifying opportunities for improvement.
- Assessing tax and payroll implications: Ensuring that benefits are correctly treated for tax purposes and administered through payroll.
- Modelling different scenarios: Comparing the employer’s total cost, the employee’s take-home pay and the value of different benefit combinations.
- Improving employee understanding: Helping employees understand their package and make informed choices.
- Strengthening governance: Ensuring that remuneration changes are properly documented, consistently applied and compliant with legislation.
The Way Forward
Remuneration structuring should be viewed as a strategic business decision, rather than simply a payroll exercise. Employers that understand the interaction between salary, benefits, taxation and employee needs are better positioned to make informed decisions about their remuneration spend.
The proposed legislative changes provide a timely reason for employers to revisit their current arrangements. By reviewing remuneration structures and considering appropriately designed flexible benefits, employers can work towards a more effective balance between business costs, compliance and employee value.
The key question for employers is no longer only how much they pay employees, but whether they are structuring that remuneration in the most effective way possible.
