Key risks and solutions
Risks
• Early termination/employees leaving the business.
• Employees no longer able to sacrifice, normally because of moving to lower statutory pay because of maternity leave or long-term absence.
• Possible longer-term impact on pension expectations.
Solutions
• Early-termination insurance.
• Passing on the cost to the employee.
• A contingency or buffer fund.
• Clear, consistent communication and good planning.
Impact on pensions
• Check that car scheme does not break any pension scheme rules.
• Salary sacrifice can reduce pension contributions.
• Employers may have to adjust their pension to take account of employees’ notional rather than actual salary.
Employers should be aware of the potential risks in a salary sacrifice car scheme and the precautionary steps they can take
Employees and employers must not let their appreciation of the benefits of salary sacrifice car schemes mask the potential risks.
However attractive it may seem on paper, the salary sacrifice route will not be appropriate for every organisation.
Such schemes may present challenges for employers with high staff turnover or a lot of low earners, or organisations on the brink of restructuring.
David Hosking, managing director at provider Tusker, says: “The employer must understand the pitfalls. For example, if it is undergoing a major restructure, will there be employees leaving the business mid-contract?
“Similarly, if the organisation is, say, call-centre based with high turnover rates and relatively low pay, there may be a risk of people sacrificing their wage close to or below the national minimum wage, which is not allowed.”
The key risk with an employee leaving part-way through a contract - perhaps because of redundancy or resignation - is that the employer will be stung with early termination charges unless it can reallocate the car.
There may also be costs around outstanding finance, collection or disposal, excess mileage and/or end-of-contract damage, although some providers do offer facilities to manage, store or reallocate cars, reducing the need for early termination.
There are ways round this. An employer can put in place early-termination insurance or a contingency fund to cover such payouts, often financed through an extra levy on the premium calculation, although this may make the scheme less attractive to some employees.
Early-termination insurance
Investing in early-termination insurance is a common tactic but is not a panacea, says Alastair Kendrick, employment tax director at MacIntyre Hudson.
“Very often, insurance is not available to cover all categories of person leaving. It may only cover forced departure, so if the person resigns, they may not be covered. There is also the question of whether the extra cost of insurance will make the offer a viable proposition.”
Another solution is for the employer simply to pass this cost on to the departing employee. David Chandler, senior manager at KPMG, says: “The employer can charge the employee a fee in the event of them leaving the scheme early, normally a number of months’ rental. But that has to be explained clearly at the outset.
“Generally, what we advise is that people design their schemes to identify the risks and then cover the cost either through the sacrifice itself or by the employee paying the cost directly. You can normally cover off most things through those two routes.”
Karen Lewis, auto solutions consultant at ALD Automotive, says: “Many employers find that putting in place a contingency fund and passing on the early-termination cost to the employee are the simplest solutions because they are easy to understand and they don’t run the risk of thinking they are covered by insurance only to find out that they are not.”
Another risk is the employee’s wage suddenly reducing, usually because they have gone on maternity leave and have shifted to statutory maternity pay, or because they are on long-term sick leave and have moved on to statutory sick pay.
Below minimum wage
The issue here is that, by law, staff are not allowed to sacrifice so much salary that it takes them below the national minimum wage. Ian Hughes, commercial director at provider Zenith, says: “The employer is still liable for payment, so if an employee is not getting paid enough to be able to sacrifice, the employer is liable to make up any shortfall or look at the option of early termination.”
A longer-term issue that needs to be explained to the employee is the possible knock-on effect that sacrificing salary may have on their pension. HM Revenue and Customs advises employers to work closely with their pension provider to ensure a salary sacrifice scheme does not fall foul of their pension scheme rules.
MacIntyre Hudson’s Kendrick says: “This is a particular problem in the public sector at the moment because salary sacrifice schemes can potentially massively reduce pension contributions.
“The wider risk to the employer is what this may mean for its pension pot down the line as reducing salaries may mean the money going into a pension scheme is reduced. With [public sector] final salary schemes, there may be a shortfall in employee contributions the government has not budgeted for.”
Generally, the key to managing and mitigating risk in a salary sacrifice scheme is to make risk an essential part of the planning process and ensure staff know exactly what they are entering into and the responsibilities and liabilities on both sides.
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