12 Ways to Cut HR Costs: Part 10 - Defer Pay

12 Ways to Cut HR Costs: Part 10 - Defer Pay

By Daniel Pollard - 30 October 2020

UK employers consulted with staff on nearly half a million redundancies during the pandemic - roughly 1.5% of the working population. The true number will have been much higher as small-scale redundancies are not captured by government statistics. The furlough scheme will have given many employers an opportunity to pause but as the scheme comes to an end, employers face some tough choices.   

Over recent months we have seen a huge amount of creativity from our clients in finding ways to minimise redundancies. Over the next couple of weeks we will share 12 possible strategies adopted by our clients and some thoughts of our own to help reduce cost without compulsory lay-offs.

10. Defer Pay

The most obvious quid pro quo for accepting a pay cut is some form of understanding the sum forgone will be repaid as some form of bonus when the good times return.

The easiest way to deal with this is a retention bonus or a cash based long-term incentive plan. 

These are simple and straightforward to implement. The main issues to consider are:

  • To decide when and in what circumstance the payment will be triggered and whether the employer will retain any residual discretion;
  • To be clear about the entitlements (if any) of leavers (good, bad and intermediate leaver); and
  • To ensure that there is no immediate tax charge.

Whilst cash plans are simple to document they do not allow for any tax efficiency. As an alternative, employers may take to tax favoured or other equity-based incentive arrangements.  

Even if none of the tax favoured incentive arrangements are suitable where management participate in equity growth then management can potentially receive capital gains tax treatment rather than income tax treatment. As capital gains are taxed at a marginal rate of 20% compared to 42% or 47% for higher and additional rate taxpayers this results in a substantial efficiency.  

For all 12 ways to reduce HR costs without redundancies click here.