Benefits surgery: Company cars and salary sacrifice

We are considering implementing a salary sacrifice arrangement for our company cars. How would this work?

We are seeing a significant amount of interest in salary sacrifice arrangements for cars. The interest may come from the view that there is a possibility of introducing this benefit at no cost to the employer. Although such schemes do have an attraction, it is important to ensure these will work for you and meet your precise requirements.

Employees will still pay a benefit-in-kind tax on the car and will need to bear the cost of the salary sacrifice. Such arrangements are therefore likely to attract employees who are taking cars that have a low benefit-in-kind. It is also worth bearing in mind that the level of benefit-in-kind is likely to change over the life of the contract, given the use of taxation to encourage car manufacturers to produce lower CO2-emission vehicles.

Employers providing such a scheme will be responsible for various costs, including the cost of the monthly lease if the employee ceases to be employed or goes on maternity leave. It may be possible to insure against the risk of these costs, but when they are taken into account, it may make the arrangement no longer viable.

It is also important to consider the impact of the salary sacrifice on an employee’s pension and to ensure the arrangement does not leave them out of pocket. Clearly, salary sacrifice can impact on benefits such as working family tax credits.

Employers will need to be satisfied that the salary sacrifice arrangement is robust for both employment law and tax purposes.