Salary Sacrifice is a cost effective and low risk way for many employees who don’t qualify for a company car to have access to a new vehicle, addressing any ‘grey fleet’ issues of using their own car for official business.
Salary Sacrifice works by allowing eligible employees to give up part of their salary under their terms of employment, in return for their employer providing a non cash benefit such as the use of a new car. Gross salary and cash allowances are usually subject to both Income Tax and National Insurance Contributions (NIC). By ‘sacrificing’ part of this gross salary for a new car, this element will not be subject to Income Tax or National Insurance, resulting in lower tax and National Insurance being paid overall by the employee (and lower NICs paid by the employer) each month.
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Alongside providing employees with access to a new car – a valuable benefit which can help staff recruitment, motivation and retention – Salary Sacrifice schemes can prove advantageous for employers. They can be cost neutral, or even save them money, and running such a scheme improves their overall duty of care and legal compliance, while encouraging the choice of lower emission cars that supports Corporate Social Responsibility, meaning both the employer and employee can benefit from a Salary Sacrifice scheme.
Vehicles are usually provided on an all-inclusive basis – including for example maintenance, insurance (including business use) and roadside assistance – and so provide peace of mind driving. In addition the employee takes advantage of any car manufacturer discounts offered to provide further savings. This means significant savings to employees can be made under Salary Sacrifice.
Sacrificing a percentage of annual salary for a non-cash benefit is widely accepted, such as with the use of childcare vouchers. However, when applied to cars, HMRC consider this a taxable benefit, which is subject to Benefit-In-Kind tax (BIK). It is important that this is understood by the employee.
The key to Salary Sacrifice success is to ensure that the scheme is appropriately designed initially, and to promote employee take-up through on-going, informative and balanced marketing which is engaging to the specific employee base. It is important that employees understand the costs and benefits, both personally and for their employer. Demonstrating how both the company and the employee will save is critical and inspires confidence in the offer.
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By GlobalDataKey information for employees – the marketing messages – should be comprehensive and jargon free, clearly explaining the pros and cons of the scheme to the employee. Offering all of the information in one location, such as a dedicated webpage or portal, will also support easier, convenient and informed decision making.
There are risks in Salary Sacrifice schemes from an employer perspective, but due diligence and appropriate scheme design before implementation, followed by good management throughout, can minimise and mitigate most, if not all of these. When designing the scheme, addressing the key issues that could be faced – such as early scheme leavers, maternity periods, long-term sickness or other absenteeism – is key to success.
Salary Sacrifice may also not be suitable for certain organisations, such as those with a high staff turnover or those employing a high proportion of low paid employees as the Salary Sacrifice cannot take an employee’s salary below the National Minimum Wage. Professional advice and guidance should always be sought when considering Salary Sacrifice schemes.
Hitachi Capital research – covering almost 3,000 vehicles from multiple customers – has revealed most schemes are cost neutral or even provide substantial savings for businesses by reducing employer contributions to national insurance.
Giving employees clear and relevant information – including the costs and benefits – will support informed decision making and is key to employee buy-in and success of any Salary Sacrifice scheme.
Andrew Baxter is Hitachi Capital’s business development manager
