Key messages for staff about car salary sacrifice schemes

Employers need to consider a number of things when communicating a salary sacrifice car scheme to staff.

Key messages for salary sacrifice schemes

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  • Employers should tell staff about potential savings on income tax and national insurance.
  • Employees need to know that company car tax bands will change every year until 2016-17, which could affect a scheme’s cost.
  • Employees may incur early termination costs if they leave the scheme or their employer.

Some employees might see signing up to a two-or three-year salary sacrifice car deal as a financial burden, so employers must emphasise the positive side, such as the savings that can be made on tax and national insurance (NI).

Matt Duffy, head of online consultancy at Lorica Employee Benefits, says: “There are a number of things employers need to consider. An employee is, of course, going to benefit from all the great things [in the scheme], but employers need to communicate how to take advantage of tax and NI savings, which will vary between individuals and the cars they take.”

Current tax rules encourage take-up of cars with carbon dioxide (CO2 ) emissions below 120g/km, but HM Revenue and Customs will be adjusting the company car tax bands every year up to 2016-17. A car’s tax bracket is determined by its fuel efficiency: cars with higher CO2 emissions incur higher tax.

The appropriate percentage of a car’s list price that is subject to tax for the 0-50g/km CO2 band will be 5% in 2015-16 and 7% in 2016-17. For cars in the 51-75g/km CO2 band, the tax rate will be set at 9% in 2015-16 and 11% in 2016-17.

How schemes operate

Staff should also be made aware of how a salary sacrifice car scheme operates . At a fundamental level, an employee contractually agrees to a reduction in their salary in exchange for a benefit.

This allows staff to pay less income tax and NI, but they may instead pay benefit-in-kind tax. There is a clear cost benefit for the employee if the benefit-in-kind tax due is less than the income tax and NI that would have been paid.

However, one negative aspect is that employees may have to pay an early termination fee if they leave a scheme early. Gary Killeen, fleet services commercial leader at GE Capital, says: “Of particular interest is whether the employee knows, understands and controls the full range of actual scheme costs, such as termination, absences from work, damage and accident costs.”

Mitigating risks

Some employers will seek insurance cover for any termination fees incurred after an initial period, but many will build their own pool of money by adding a premium to cover exit penalties.

“Mitigating the risk can be managed,” says Lorica’s Duffy. “Employers can put in insurances to cover claims from the first six months. They also put in a pot of money for the employee should there be any debt.”

Staff must also be warned about other associated risks. For example, employees cannot legally sign up to a salary sacrifice agreement if it takes their earnings below the minimum wage. Also, employers and employees must be aware of the ongoing changes to tax bands for company cars, which could affect the cost of schemes.

Implications of absence

Another important matter to communicate to staff is the implications of long-term employee absence, such as maternity leave or sickness. In the case of maternity leave, while the employee’s pay will gradually reduce, the salary sacrifice contribution towards their car cannot be altered.

David Hosking, chief executive officer of fleet provider Tusker, says: “Employers that are looking to introduce a scheme should do so with [a provider] that is experienced in dealing with these issues and dealing with complex schemes.”

Salary sacrifice car schemes offer employees a cost-efficient way of obtaining a new car that is fully maintained and insured, but staff must be given the full facts, including pros and cons. GE Capital’s Killeen adds: “Whatever an employer decides to communicate, a clear and concise policy that is fully understood by the employee is essential.”