SALARY SACRIFICE on elements of an employee benefits package has been around for some years but as applied to cars, at 50,000 to 75,000 vehicles, it is still relatively small.
With around one million company car driving employees, according to Salary Sacrifice Car Schemes, a Leasedrive Essential Guide, there is definitely scope for a portion of these to look at this method. The advantages can be measurable for both employer and staff, particularly as the economy starts to recover and companies may be looking for a non-cash means of rewarding employees.
In most arrangements, the employer leases vehicles from a fleet leasing company and subleases to employees, who agree to have their salary reduced by a set amount per month. In return, they get a fully expensed car (except fuel) over a fixed period, usually two to four years, and benefit from good rates on the back for corporate buying clout. Salary sacrifice has to run for a minimum duration, as yet undefined by any court but considered by tax specialists to be 12 months.
Because the sacrificed amount is taken before tax, employees save tax and NIC on that sum but are liable for BIK on it, making these schemes particularly efficient for vehicles with low emissions. Communication surrounding these points is essential.
Conversely, the employer pays a more tax-efficient salary and lower NI contributions; creates greater employee satisfaction; increases appeal for retaining and attracting staff; reduces grey fleet, with attendant increase in duty of care; and plays to corporate environmental policies with low-emissions cars. Despite the tax savings, salary sacrifice constitutes a change in employment conditions and does not fall under tax law.
Abbey’s car habit
Through its acquisition of Abbey, Bradford & Bingley and GE Money, Santander had 33,000 staff covered variously by ECO, cash allowance and outright purchase car schemes. “There were numerous private cars carrying out business miles. I reviewed these contracts and recommended a policy for company car drivers,” says group fleet manager Tom Manahan. “The idea was to manage risk and minimise the grey fleet but I was aware that salary sacrifice was a good way to enhance a salary.”
The bank now has one company car programme for those who drive 8,000 or more business miles a year, plus a salary sacrifice option for all employees, who now number 28,500. Both are managed by Zenith.
Emissions are capped at 120g/km and with 270 company cars and 990 salary sacrifice vehicles, Santander has buying clout with manufacturers. In addition, some of those who have a company car also qualify for a car under salary sacrifice for anyone residing at the same address, up to a maximum of two cars in total. “We can provide a fantastic benefit at no cost to the business – and it aids retention,” says Manahan.
High turnover a turnoff
However, salary sacrifice is not a catch-all. Companies with a high turnover of staff (15% or more) risk being left with early termination penalties if employees leave before their contract is up and although contingencies can be built in, if these are passed on to staff, this increases the cost and reduces the appeal. For the same reason, salary sacrifice is best run to be cost neutral rather than as a way for the company to save money.
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And salary cannot be sacrificed if the employee is earning below the minimum wage, so all deductions from salary need to be taken into account before entering into such an agreement.
“Success of any salary sacrifice scheme should not be measured on how many schemes you run but on take-up of schemes and number of units; you need economies of scale,” says national sales manager for Hitachi Capital Car Solutions David Jackson. So because typically, only 10 per cent of contenders take up the option, salary sacrifice is normally viewed as being best suited to companies with upwards of 1,000 employees. In addition, for smaller organisations, the time and effort required to set it up can outweigh the benefits.
However, sgfleet leases direct with the employee, removing both the hassle and risk from the employer. “If the employee leaves, the lease follows them, so the individual can take on the lease personally but without the tax benefits; the next company can take it on or the employee can terminate it,” says director of sales and customer service for sgfleet UK Peter Crabtree. “That gives us the ability to talk to customers of all sizes – our smallest is only 180 employees.”
This does, however, mean that the employee bears the burden of any penalty attached to early termination, though Crabtree says an employee’s choosing to terminate the lease “is the least likely option, from our experience”.
Some companies have moved their entire fleet from contract hire to salary sacrifice but that does not give a huge financial saving, as salary sacrifice is also contract hire. It is not a universal remedy and works best as one of several solutions to running a company car fleet but given low-emission cars with good residual value, plus clear communication to employees about the monthly lease cost and BIK, it can provide considerable advantages to both employee and employee.