Salary sacrifice car schemes are an employee benefit that should not be overlooked for those businesses competing for talent and wishing to both attract and retain a high calibre of employee.
According to a recent survey by OSV A third (33%) of all interviewees said that the best perk their job could offer was the company car; One in five (19%) workers, said a company car was the deciding factor when taking a job; 16 per cent stated that not having a company car was a deal-breaker; For 41% of people it provides an opportunity to drive a car they wouldn’t ordinarily aspire to.
So why is this the case? Salary sacrifice car schemes allow employees to benefit from driving a reliable, safe, regularly maintained, insured and taxed vehicle. In order to receive this benefit the employee agrees to a reduction in their salary for the additional non-cash benefit. Salary sacrifice car schemes basically replace one form of tax with another, shifting part of the employee’s remuneration out of their salary taxed at 20% or 40%, plus National Insurance, into a benefit car where the starting rate of BIK tax on very-low-emission models in 2015/16 is just 5%.
But it is not just all one way, salary sacrifice benefits the employer too – The reduced level of tax paid by the employee means there is a lower Class1A National Insurance (NI) bill for the employer too. The employer does not pay National Insurance on the salary sacrificed and only pays class 1a NI on the value of the company car benefit. Also, it is often overlooked that the employer can often enjoy a saving on mileage allowances paid, due to the fact that the employee is no longer using their own car for business travel. The employee can no longer enjoy the approved mileage allowance payment, which is generally higher, but instead get reimbursed at the advisory fuel rate according to the car’s engine capacity.
Additionally, duty of care and corporate social responsibility (CSR) which are both high on the boardroom agenda, can be addressed by introducing a salary sacrifice scheme with limits on the choice of vehicle relating to emissions thresholds. The introduction of CO2 emission taxation in 2002 has made many drivers think green. Salary sacrifice naturally incentivises employees to choose greener vehicles because BIK tax is lower on low-CO2 cars.
Salary sacrifice benefits for the employee:
- Pay less tax and NI
- No credit check or deposit required
- Improved personal cash flow
- Status of new car
- Lower fuel bills from latest fuel efficient cars
- Salary sacrifice benefits for the employer:
- Low cost or cost-free to introduce
- Improved corporate tax efficiency
- Low Class 1A NI
- Strengthens Green credentials
- Employee retention
- Aids grey fleet management
There are a few minor obstacles to be aware of:
Can your employees afford to forego the salary?
In the current economic climate you need to consider that the level of salary sacrifice may be difficult for some employees where family budgets are tight, and there is no tax or NIC exemption with car schemes in the same way that there are for say childcare voucher schemes.
Getting HMRC approval
As part of building a business case, an employer has to obtain HM Revenue and Customs (HMRC) approval for its scheme. To satisfy itself of the legal validity of a salary sacrifice arrangement, HMRC may want to see copies of revised contracts of employment between the employer and employee.
Parental leave and early termination costs
During ordinary maternity, paternity or adoptive leave salary sacrifice benefits must be continued to be paid based on the employee’s usual earnings. To cover these cases it is important to build pots of money to cover any costs incurred which can be based upon your lower NI contributions.
In terms of early termination there may be fees that the employee has to pay if they decided to leave the company before the 2-4 year term on the scheme is up. If they wish to leave then they can either pay this fee of often opt to buy the car outright at a reduced fee.
Qualifying for benefits
For most employees this will not be a problem but for some, even if their income remains above the Lower Earnings Limit, because they are paying less NIC, their entitlement to contribution-based benefits, earnings-related benefits and work-related benefits may be reduced. It is important to make them aware of this.
With all of this in mind salary sacrifice car schemes are still an attractive employee benefit which can help your business to uphold their Duty of Care. 2-4 year leases on these vehicles can help to protect your employees that are driving for business purposes by providing them with the latest models which incorporate up-to-date safety features. You can also have full control on regular maintenance and service checks of the vehicle unlike the alternative of allowing grey fleet vehicles to be used.