When a company takes care of its workers, it ensures that their workplace is full of conveniences and facilities. As a result, the workforce feels much more motivated, and both their commitment and their productivity will increase. In order to achieve this greater well-being, the company – with the approval of the worker – can offer flexible remuneration, a salary formula that has been much in demand in recent years, given that the economic crisis has closed the door to wage improvements.
What is Flexible Remuneration?
Flexible remuneration is a type of remuneration which allows the employee to allocate part of their gross salary to the purchase of certain products or services at below market prices. In this way, workers can receive a total or partial tax exemption, whereby they can avoid or reduce the personal income tax (IRPF) payable on these products and services, since they pay for them from their gross salary. In other words, thanks to flexible remuneration a considerable saving is achieved every month, and therefore the net annual salary is higher. Above all, flexible remuneration has three important advantages:
- Employees’ net salary can be increased
- It does not increase salary costs
- It improves the motivation of the workforce
Remuneration in kind, flexible remuneration and social benefits. Are they the same?
No. Although they are sometimes used as synonyms, these concepts have different shades of meaning. Law 35/2006 on Personal Income Tax (IRPF) considers “all remunerations or returns, whatever their name or nature, in cash or in kind, resulting directly or indirectly from personal work or the employment or statutory relationship” to be income received from work. And these are made up of:
● Wages and salaries
● Unemployment benefit
● Remuneration under the category of entertainment expenses
● Subsistence allowances and travel expenses
● The contributions or payments made by the promoters of pension plans or by the business owners to meet the cost of pension commitments
While we all understand what financial remuneration is, what does the law refer to when it mentions remuneration in kind? Well, income in kind is defined as the use, consumption or obtaining, for private purposes, of goods, rights or services free of charge or below the normal market price, even when these do not incur a cost to the provider.
And this income in kind, also known as remuneration in kind, is the category which covers everything related with social benefits, flexible remuneration and combinations of both.
So, to recap, flexible remuneration allows workers to allocate part of their salary to the payment of certain products, in order to take advantage of tax exemptions.
Difference between social benefits and flexible remuneration
Both concepts form part of remuneration in kind, although they are not the same. Social benefits are goods or services that the company (assuming the entire cost) offers workers as remuneration or payment in kind, in addition to their salary in money. The social benefits offered by each company usually depend on the collective agreement to which the company is a party, wage policies, internal human resources policies, talent management policies, etc. With flexible remuneration, on the other hand, the company offers the worker the opportunity to choose the proportion of their salary they wish to continue receiving in the form of money and the proportion they wish to receive in kind (products or services). A worker can allocate up to a maximum of 30% of their gross annual salary to flexible remuneration. In this way, the amount allocated will be exempt from IRPF and therefore the worker’s net salary will increase.
The company can choose what services (restaurant vouchers, childcare vouchers, travel card, medical insurance…) it offers its employees as a social benefit and what services it
offers as flexible remuneration, or even opt for a mixed model.
Requirements for receiving flexible remuneration
According to Article 42 of Ley 35/2006 on IRPF, for a remuneration to be considered as flexible remuneration, a number of conditions must be met:
● The total figure allocated to Flexible Remuneration cannot exceed 30% of the annual salary.
● There will be no handover of cash for employees to purchase a product, but they will be able to obtain products free of charge or below market cost.
● The basis for calculation of Social Security contributions for a worker who has opted for a flexible remuneration arrangement does not change. It will be the same as that of a worker who has not opted for this arrangement. It is the IRPF that will change.
● Flexible remuneration will not necessarily represent an expense for the company.
● It is a service that the employee will use on an entirely voluntary basis, and use of the service will not incur any cost to them.
● In all cases, it will be a benefit that is generated within an employment relationship between the company and the employee.
● The arrangement will not include expenses related with a direct professional activity, such as a work tool or a business trip.
● There will have to be a novation of the existing employment contract.
Services or benefits offered by a flexible remuneration package
Spanish companies (with the exception of those in the Basque Country and Navarra) can offer a number of products and services as part of a flexible remuneration package.
One of the star products, either in the form of the famous meal vouchers or restaurant cards. Although the company can establish its own conditions, normally the limit is up to €11 per working day (€220 per month).
This is very attractive, since it is totally exempt from IRPF. For companies, this is a way of motivating the worker, since training (courses, postgraduate studies, Masters degrees…)
can satisfy the intellectual curiosity of the employee, without representing any additional cost for the company. There is no limit on what can be spent.
By using childcare vouchers, the worker is exempt from IRPF with no annual or monthly limits. This represents a considerable saving, corresponding to approximately 2 free childcare payments. The sole condition is that only crèche services are covered (from 0 to 3 years), not pre-school education or nursery school (from 3 to 6 years).
Although this product does not offer immediate savings, it is extremely beneficial in the long term. Pension plans as part of a flexible remuneration package have become popular, since they provide savings that will complement the state pension to be received by the employee on retirement. Through a pension plan provided by the company, workers can make a fixed monthly contribution from their salary, with the corresponding tax exemption.
If the company collaborates and also contributes a sum of money, this becomes a mixed benefit (flexible remuneration and social benefit). Furthermore, contributions to pension plans can be deducted from the company’s taxable amount for the purpose of Corporation Tax.
This is one of the products that is offered most. This service can be offered as a social benefit or as part of a flexible remuneration package. Health insurance also offers the option of including immediate family members and obtaining the same benefit, although family members are not exempt from making Social Security contributions. Workers can deduct up to a maximum of €500.
Since 2010, employees’ travel from home to their place of work by public transport has been categorized as a benefit within the flexible remuneration package. The upper limit is €136.36 a month (€1,500 a year).
So clearly, flexible remuneration is an alternative salary model that is very attractive to both the company and the worker.