Could your seasonal payroll goodwill be fuelling the January Blues?

We’re reading so many reports of people dreading Christmas this year, wondering how on earth, with costs continuing to soar, they can stretch already tight budgets to pay for festive treats for the family.

So, as a responsible employer that cares about your staff, you’re no doubt thinking about what you can do to help out, and there are two tried and tested options that may be included in your usual go-to goodwill policies: the pre-Xmas bonus as a boost to December pay packets; and bringing forward the December pay date to give staff early access to cash to help with buying the turkey and trimmings.

Nothing wrong with that – other than of course the obvious implications of a ‘long month’ ahead until the next payday. But what about lower paid staff who are topping up their household income with welfare benefits – what are the implications for them?

How do you define ‘lower paid’ staff?

First, just to qualify, there’s no hard and fast rule about the salary level that constitutes ‘lower paid’, but as a rule of thumb, you might want to focus on staff earning up to 10% above Real Living Wage. For someone working 37 hours/week that’s around £23k pa, and almost £25k for 40 hours/week. So let’s make our benchmark for ‘lower paid’ under £25k.

What’s the earnings threshold to qualify for welfare benefits?

Equally, there’s no solid income line below which someone would qualify for welfare benefits – again it’s entirely dependent on their own individual situation – whether they have children, if they or someone in their care is affected by a disability, how many bedrooms they have in their home, their overall household income, the list goes on. But to keep things simple, using around the same benchmark – under £25k – should give you a reasonable starting point. There are reportedly 6 in 10 families experiencing the benefits system who have at least one member of their household in work.

So if your workforce includes staff who are earning under £25k, there’s a high likelihood that some of them at least will be receiving welfare benefits, and let’s assume that in most cases that includes Universal Credit. In that case, unfortunately these go-to employer gestures of goodwill – the pre-xmas bonus and the early salary payment – although well meaning, can lead to members of your staff that ironically may need the cash boost the most being out of pocket as a result, with the financial impact being felt at the end of January (and therefore the whole of February), not giving them the start to the new year they’d hoped.

Here’s why.

How early pay days affect staff claiming Universal Credit

Ok, first a rider statement. Universal Credit (UC), the way it’s calculated and paid, is complex. If you would like to understand more about it Society Matters has a great 2-hour workshop – In-work Benefits – A Guide for Employers – which will help a lot. You may also find this information on UC and work from DWP useful (although it’s probably best to top up your coffee first …).

So through this article, the plan isn’t to attempt to fully unpack the whys and wherefores but to explain enough for you to understand the impact and, hopefully, to help you to do something about it.

UC claimants receive their payment on the same day each month and that’s determined by the date they received their very first payment.  The amount they earn in any month from paid employment will be taken into account when DWP calculate the UC payment they’re entitled to the following month. An early payday is likely to mean that the claimant – your employee – will have received essentially double the earnings in one assessment period, and that is likely to mean that their income exceeds the threshold under which they receive a top-up of their earnings through UC.

The implications of this can be that their UC top-up is significantly reduced or even that they don’t receive their UC top-up at all (and that may mean they don’t receive support for example to pay housing and childcare costs). Added to that, qualifying for UC can be a gateway to other benefits such as Carers Allowance and Tax Credits, so they may not receive these either, and to top it all, if their income is over a certain threshold this would be classed as ‘surplus earnings’ which equates to savings, which will also have an effect on their eligibility for benefits.

So what can you do about it?

The best advice we can give is for you to check with your employees whether they would like to receive the advance salary payment before you go ahead with it – as it’s unlikely you will know exactly who’s claiming welfare benefits, it’s best practice to ask everyone. If you’re able to run two payrolls to accommodate both preferences then that would be ideal.

Within any communication about a possible early pay date, you can also reference the need to budget carefully in January if they do receive the advance payment, whether they are on benefits or not, because early paydays make the distance between pay dates a long time for everyone. Specific reference in your communication to anyone claiming welfare benefits would also be a good idea, with an acknowledgment that you recognise that a change of pay date can have an impact on benefits claims – in that case, employees who hadn’t considered it beforehand will have the opportunity to look into it now so they can plan ahead for January.

If you’d like to know more about how UC calculations work for people who are employed there are some examples here (but be warned, this is not for the feint hearted!).

The pre-Xmas bonus trap for benefits claimants

The same basic principles we’ve outlined above for the early payday apply to the pre-Xmas bonus. UC entitlement for people in work is calculated based on an amount DWP has determined you are able to earn and still qualify for the benefit (the  ‘Work Allowance’). Again, this is based on individual life circumstances. Anything your employee earns over their Work Allowance is subject to a 55p levy for each £1 earned until the total earnings are over the amount they would have received from UC alone.

So, let’s imagine that you pay a pre-Xmas bonus to every member of staff. Whilst higher earners are enjoying their unexpected treat, the employee claiming benefits will have the bonus taken into account when their UC is calculated in January, and if the bonus takes them over the total earnings limit for UC this is likely to stop their UC altogether that month – plus the other qualifying benefits as already explained. If the bonus is so significant that they will earn over their total earnings limit that’s great, other than this could take them into surplus earnings with the resulting impact already explained earlier.   So really they have no option other than to decline the bonus (assuming you give them the option – although you may feel this isn’t quite the spirit of what you’re aiming to do it would be good practice to do so) or ensure your communications to staff includes a message to ensure staff set aside the money to make up the difference in their reduced benefit payment in January if they are claiming UC. But when cash is so tight it takes a lot to do that, particularly at Christmas.

So what’s the solution?

It’s been suggested that giving vouchers instead of money in pay packets could avoid this problem for people on benefits, however please proceed with caution to avoid flouting the tax rules associated with taxable benefits. If the voucher is deemed to be a substitute for income it’s taxable and therefore needs to be declared as earnings, and therefore it counts towards income for the purpose of a UC calculation too. However, HMRC does allow ‘trival benefits’ to be paid tax-free as long as the value is below £50 – see details here. As always please check with your tax adviser before going ahead to make sure your plans qualify, because making undeclared payments will have serious consequences for all parties involved.

You may, of course, also be considering whether to give lower paid employees a more stable uplift in earnings, avoiding bonuses altogether – good idea.

Jayne Graham MBE FIEP

This article is brought to you by Society Matters cic with the support of the North of Tyne Combined Authority as part of the implementation of Pillar 3 of the Child Poverty Prevention Programme which aims to alleviate in-work poverty for employers across the North of Tyne area.