Fleet salary sacrifice is not without its risks, and employers and employees should recognise the potential financial pitfalls
Company car salary sacrifice schemes bring many benefits, both to employer and employee, but they are not risk-free and will not suit every business.
It is imperative that both employers and employees are fully aware of these risks. “If you are opening up a company car scheme through salary sacrifice to a whole employee population, that is potentially going to leave you liable for some extra risk, particularly around the possibility of early termination costs,” says Ben Creswick, head of business development at Zenith Provecta. “So it is vital that the business understands those risks and has put in place options for mitigating them,”
Early termination risks encompass anything that could result in the employee no longer being able to continue with the salary sacrifice offer, and will often be around resignation, redundancy, long-term sickness and maternity or paternity leave. The main financial risk for the employer in these scenarios is that it risks being stung for any outstanding finance, collection or disposal costs, excess mileage charges and/or end-of-contract damage charges.
For resignation and redundancy, it is self-evident that the agreement will have to cease. When it comes to long-term sickness and maternity or paternity leave, the issue is normally around the employee no longer being able to sacrifice the required amount because they have moved off their normal salary and on to statutory maternity, paternity or sick pay.
National minimum wage
By law, employees are not allowed to sacrifice their cash pay to below the level of the national minimum wage and, in such circumstances, cannot continue with the agreement, leaving the employer with little option but to step in and foot the bill or look at early termination.
Another risk that needs to be addressed is what knock-on effect any scheme might have on an individual’s pension contributions and possible retirement income, particularly for employers which are still operating a final salary pension scheme.
HM Revenue and Customs, for one, advises employers to co-ordinate closely with their occupational pension provider to ensure any salary sacrifice offer does not fall foul of their pension scheme rules and to ensure that staff who enter into a salary exchange scheme are not disadvantaged, pointing out that whether contributions into an occupational pension are affected remains very much up to the employer.
Another, albeit longer-term, risk is the unknown quantity of new legislation. As we have seen, the current tax regime is beneficial towards low-CO2-emitting company cars. HMRC has also, so far, adopted a relatively light touch here. But, particularly with a new government in power, there is always the possibility of changes that could affect the payments employees have to make, income and/or company car tax, NI rates or bandings or, indeed, how the HMRC approaches the whole issue.
For the employer looking to implement a scheme in the short term, this may not be an immediate problem, but it is a future risk worth noting.
Mitigating the risks
So, how to mitigate these risks? There are several solutions when it comes to early termination. It is possible to include clauses in the terms and conditions of the car policy that will enable you to take termination costs from a driver’s final salary. Another option is to put in place early termination insurance, which you can add to the cost of the salary sacrifice calculation (it varies, but a rule of thumb is £20 to £50 a month) and pass on to the employee that way.
Yet another alternative is to build up a buffer or contingency fund to cover early termination costs. Again, this can be financed through an extra levy on the premium calculation, though of course both options will reduce the savings the employee makes, possibly making the scheme less attractive as a benefit.
Some providers also offer a facility to manage, store and reallocate vehicles to employees, thus reducing the need for early termination.
“There is no one-size-fits-all answer,” says Phil Cottee, product services manager at LeasePlan. “It is just about making sure that management, in particular HR and finance, are fully aware of the risks and have an idea of how they will manage them.”
Risks to mitigate
- Company car salary sacrifice schemes can bring with them risks around early termination, pension contributions and legislative changes.
- Employees cannot sacrifice to below the minimum wage, and so going on maternity, paternity or long-term sick leave can be an issue.
- Employers should decide whether pensions contributions for staff using salary sacrifice will be affected.
- Early termination insurance, recognition of the risk within the terms and conditions of the contract and the creation of a buffer or contingency fund can all mitigate some of the risk.
- A change of government could lead to tax changes affecting staff payments.
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