Employee benefits are non-cash provisions within the reward package, although they can have a financial cost for employers, for example paid holidays, pensions, or company cars.

They may be offered for business reasons, for example to attract and then motivate employees to achieve organisational objectives, and/or ‘moral’ reasons based on a desire to care for employees’ wellbeing (and, in so doing, potentially enhance employee commitment). The prevailing financial, legal, and social background also plays a role in the development and shaping of benefit policies and practices.

A brief history of UK employee benefits

In the earliest days of UK benefit provision, some firms offered benefits because they believed they had a duty of care to their employees, a policy commonly referred to as 'paternalism'.

At the turn of the 20th century, the state introduced benefits for the general population. After the Second World War, the welfare state was established to provide such benefits as unemployment insurance, sick pay and state pensions, as well as the National Health Service. While many universal state benefits provide a safety net, some organisations build on this by offering their own more generous or complementary arrangements.

During the 1970s, attempts to control the growth of pay, combined with high marginal tax rates, drove many employers to develop generous benefits provisions, especially for senior staff, to circumvent the difficulties in using fixed pay.

Since the 1980s, the tax regime for employee benefits has tightened, limiting the attractions of certain benefits over cash. However, it can prove hard to remove or downgrade such benefits once they have become an established part of the package.

Recent developments

More recently, some employers have adopted a more individualistic approach to employee reward, transferring more of the risk (and potential reward) and cost of the provision to their people. Benefit provision has seen a widespread shift from defined benefit pension schemes to defined contribution plans (particularly in the private sector) and some movement from fixed to flexible and voluntary benefits.

However, employee benefits are no longer seen just as a retention tool. Research finds that what makes an organisation’s employment proposition attractive depends on an employee’s individual circumstances (such as being a carer). This has created the concept of ‘total reward’, where employers adopt a bundle of mutually supporting financial and non-financial rewards (such as flexible working) that align to the needs of both the business and its workforce. Such an approach has led many to regard employee benefits as a strategic tool to help attract, retain, and motivate the talent needed to support the organisation’s purpose and performance. See our factsheet on strategic and total reward.

One employer concern is whether their people can adjust to a situation where they shoulder more of the risk (and reward). As well as the moral duty some employers feel towards helping to educate staff about the possible consequences of their benefit decisions, there is the business case that a financially secure workforce can bring. For more, see our Employee financial wellbeing report.

The cost of living crisis is encouraging employers to explore how the benefits package supports employee financial wellbeing and reduces the risk of workers falling into poverty. Those perks that help offset the cost of housing, travel and childcare can be useful to those on the lowest incomes. For more information, see our guidance.

Our Reward management surveys find that main benefits UK employers offered to either all employees or dependent on their grade, location or occupation include those covered below.

Pensions

These are widespread due to legal requirements. One of the more costly parts of the benefits package, workplace pensions are often at the centre of major internal or external change.

Holidays and time off

Employers are legally required to offer certain levels of paid annual holiday, although our Reward management surveys find that many offer more than the minimum.

There are also statutory entitlements to other types of time off work including maternity, paternity, adoption, parental and bereavement leave. As with holidays, many employers often provide more generous time off arrangements than required by law. There's more in our Working hours and time off work factsheet.

For other types of discretionary paid time-off, such as for voluntary work, child’s school events, and pet bereavement, please see our Reward Management Survey.

Healthcare and risk benefits

These benefits may be provided to ensure both the welfare and productivity of employees. Our Reward management surveys find that the common types of benefits include:

• Employee assistance plans.
• Eye care vouchers.
• Death in service/life assurance.
• Occupational sick pay..
• Free vaccinations.
• Programmes to encourage physical fitness.

Some benefits are more likely to be given to everyone (such as occupational sick pay), while others (private medical insurance for instance) can be dependent on factors such as grade, job or location.

Group risk insurance policies, including group life assurance, group income protection and group critical illness, transfer some of the risk to a third party.

Company cars and car allowances

Many organisations provide a company car, either because the employee’s job needs it (for example, a sales rep) or to recognise the job’s status (for example, a director). Such vehicles are taxed according to their CO₂ emissions. Some employers prefer to pay a cash allowance to help employees buy cars or compensate them via mileage allowances for using their own vehicles, rather than supply a company car.

Other benefits

Employers may offer a diverse range of other employee benefits including: unlimited holiday; paid or part-paid conference attendance; Christmas parties; concierge services; relaxation apps; free or subsidised staff canteens; and a nap room. See more on the variety of staff benefits on offer in our Reward management surveys.

Cash or benefits?

Some employers prefer to provide cash to enable employees to purchase those benefits that best meet their needs. This approach, often called ‘clean pay’ is easily communicated, understood, and administered.

However, on the downside, staff could:

• Spend more money buying their own benefits than it would have cost the organisation to do so on their behalf.
• Spend work time searching for the best deals.
• Make poor choices.

Voluntary, discount and flexible benefits

Voluntary, discount, and flexible benefits schemes aim to offer employee choice by providing flexibility over individual benefits packages, but it’s important to distinguish between them.

Both discount benefits and voluntary benefits allow employees to buy discounted products or services through their employer out of their own taxable pay or via a salary sacrifice arrangement. Voluntary benefits are more formal. They are often arranged by a benefits provider, and purchases are made via the payroll. Discount benefits are less formal, with employees making purchases from their bank account. While the employer does not pay for the benefits provided under both types of schemes it may incur research, administration, and communication costs. 

Flexible benefits arrangements (known also as ‘cafeteria benefits’ or ‘flex plans’) allow staff to vary their package to meet their own needs. The dividing line between pay and benefits is less fixed and employees are able either to retain their existing salary while changing the mix of various benefits they receive or move their salary up or down by taking fewer or more benefits.

Such arrangements can align with the increased focus on reward individualisation, help address inclusion and diversity, be cost-effective and assist in the harmonisation of reward practices, especially during a merger or acquisition. In practice, flexible, voluntary and discount benefits schemes may be used by the same organisation.

When offering such schemes, it’s important that the choices, and their consequences, are made clear to employees. If the options are seen as complicated, or the method of making choices as difficult, then individuals may just keep their existing benefits package and much of the resource spent introducing the scheme will have been wasted. In some instances, it may be more appropriate to offer a limited but meaningful choice of options. Our report Show me the money! The behavioural science of reward has more on how employees may respond to choice.

Before introducing, revising, or removing a benefit, it’s important for people professionals to ask:

• Why are we offering the benefit? How does it support the organisation’s business and people goals? How does it reward the required values and behaviours?

• How does the benefit fit into the HR and reward strategies? Does it support the people management and development practices the organisation requires?

• Will the change be valued by current and future employees? Have their views been researched?

• How will the benefit be launched? Who are our key internal stakeholders and how will they be involved? Does the launch team have the required skills, knowledge, and support?

• How will the organisation explain what's being introduced, and why, to line managers? How will the benefit be explained to staff, including what they must do to get it? How will the benefit be communicated on an ongoing basis?

• How will the change be explained to our external stakeholders, such as investors or customers? Do their views need to be considered and, if so, how?

• How flexible are the implementation and communication plans to changes in the business context?

• Do our people have the knowledge, skills and attitudes needed to make informed decisions? Is there a need to invest in financial awareness?

• Does the organisation need to invest in the technology that will allow it to assess whether the benefit is meeting the organisation’s goals?

For more on benefits communication, and evaluation, see our Reward management surveys and our employee communication factsheet.

Contacts

GOV.UK - Expenses and benefits for employers

HM Revenue and Customs

The International Employee Benefits Association - IBEA

Books and reports

PERKINS, S.J. and WHITE, G. (2020) Reward management: alternatives, consequences and contexts. 4th ed. London: Chartered Institute of Personnel and Development.

ROSE, M. (2018) Reward management: a practical introduction. 2nd ed. HR Fundamentals. London: CIPD and Kogan Page.

Visit the CIPD and Kogan Page Bookshop to see all our priced publications currently in print.

Journal articles

BARTON, T. (2016) How to determine which group risk benefits best suit an organisation. Employee Benefits. 27 July.

BASKA, M. (2018) Businesses ‘throwing money down the drain’ by not communicating employee benefits. People Management (online). 27 July.

HOWLETT, E. (2019) Why the most effective employee benefits don't have to cost you anything. People Management (online) 22 August.

HOWLETT, E. (2020) What benefits should you be providing to home workers? People Management (online). 26 October.

CIPD members can use our online journals to find articles from over 300 journal titles relevant to HR.

Members and People Management subscribers can see articles on the People Management website.