What are salary sacrifice company car schemes?
Salary sacrifice car schemes have become a popular benefit, allowing employees to sacrifice a portion of their monthly salary in return for a new car.
Employees benefit from having a safe, maintenance-free car, while employers go some way to demonstrating compliance with their duty-of-care requirements under the Corporate Manslaughter and Homicide Act 2007. These schemes may also help with employee retention, since employees are usually locked into the scheme for a two- or three-year period.
What are the origins of salary sacrifice company car schemes?
Salary sacrifice on cars was first launched in 2008.
Where can employers get more information and advice?
More information is available from The Association of Car Fleet Operators (ACFO) at www.acfo.org and at www.employeebenefits.co.uk/company-cars.
What are the costs involved?
Scheme provider Tusker has estimated that employees can save an average of £900 a year on income tax and national insurance contributions (NICs) and up to £500 a year on fuel, depending on the efficiency of the model they choose, while an employer could save approximately £300 net per employee per year on NICs.
What are the legal implications?
In the Spending review and autumn statement 2015 policy paper, the government expressed its concern at the growth of salary sacrifice arrangements. With this in mind, employers launching a new scheme would do well to start with a pilot before seeking approval from HM Revenue and Customs (HMRC), which it will only give post-launch. Employers also need to ensure employees do not fall below the national living wage, which will take effect in April 2016, or the existing national minimum wage. This can be a bigger issue when employees have opted into salary sacrifice arrangements for more than one benefit.
What are the tax issues?
Both employer and employee save on NICs, owing to the reduction in salary, however the employee does attract some tax liability because cars are classed as a benefit-in-kind.
What is the annual spend?
There are no industry figures collated for the spend on salary sacrifice car schemes.
Which providers have the biggest market share?
The main providers in the market are Affinity Vehicle Leasing, ALD Automotive, Alphabet, Autoserve, Fleet Evolution, Fleet Hire (including Car Salary Exchange), Hitachi Capital Vehicle Solutions, Inchcape Fleet Solutions, Lex Autolease, LeasePlan, Ogilvie Fleet, Pendragon Vehicle Management, SG Fleet (including Novalease), TCH Leasing, Tusker, Venson Automotive Solutions, Zenith (including Leasedrive).
Which have increased their market share the most?
With no industry figures collated, this is impossible to assess.
Salary sacrifice schemes for cars have been increasing in popularity since they first launched in 2008, with research by global strategy consultancy OC&C estimating that 10% of new car sales will be part of a salary sacrifice scheme by 2025.
However, employers would be forgiven for being slightly wary when considering setting up a new scheme, with the government flagging its concerns over salary sacrifice more than once in the past year.
Car schemes are slightly different to other salary sacrifice schemes because employees also pay a benefit-in-kind (BIK) tax on the vehicle, prompting consultancy firm PricewaterhouseCoopers (PWC) to report that car schemes are tax positive to the Treasury over a long-term basis.
But owing to the question mark that lingers over salary sacrifice generally, it is advisable for employers to seek scheme approval from HM Revenue and Customs (HMRC) when setting up a new scheme.
The only snag is that HMRC will only give approval after the first transaction has taken place, so it may make sense to introduce the arrangement to a limited number of employees first before rolling a scheme out. For approval to be given, HMRC asks to see evidence of the variation of terms and conditions and pay slips before and after the introduction of the salary sacrifice arrangements.
Under salary sacrifice the employee pays less income tax and both employer and employee are eligible for reduced national insurance contributions (NICs). The amount of BIK tax due is calculated according to a number of variables, including the type of fuel used and the official carbon dioxide (CO2) figure of the car. Because more fuel-efficient cars attract less tax, the most popular models offered and taken up are those with low CO2 emissions. Electric cars, which attract no BIK tax, are also becoming more common under these schemes.
Those already in salary sacrifice schemes have been reassured that they will not be negatively affected by last year’s Volkswagen scandal, where Volkswagen Group was found to have cheated in emissions tests. HMRC has stated that cars will not be rebranded for BIK duty. According to research by scheme provider Tusker, Volkswagen came seventh in the top 10 manufacturers chosen under salary sacrifice schemes in the first quarter of 2015.
Besides the tax benefits of salary sacrifice arrangements for cars, there is the added advantage that employers are assured employees are driving a safe, more environmentally friendly car.
By enabling staff to sacrifice a portion of their salary rather than providing a cash option, the employer is less at risk of an employee choosing to drive an older car and spending the cash elsewhere. Under a scheme, the car is regularly maintained and serviced, so providing a car in this way also helps employers meet their legal duty-of-care responsibilities for staff required to drive on business.
Despite the benefits, there are some issues to look out for when considering implementing a salary sacrifice scheme. The first relates to parental leave and long-term sickness. When an employee is on maternity or paternity leave, or long-term sick leave the employer is obliged to continue providing the benefit, despite a potential drop in salary, or the individual even being on unpaid leave.
Additionally, under salary sacrifice, ownership of the car is retained by the employer, putting them at risk of shouldering an ongoing liability if an employee leaves. The most common way to mitigate against this risk is by adding early termination insurance to the premium or setting up a contingency fund that can be built up through an addition to the premium paid.
Another option is novated leasing. Under this model, the contract is between the employee and the provider, not the employer. If the employee leaves, they take the car, and the contract with them.
To guard against issues, the salary sacrifice contract should specify what is expected if an employee leaves an organisation and wishes to end the terms of the car scheme early. However, a scheme can also act as a good retention tool, with most contracts lasting for two to three years.
Another potential issue is the risk of salary sacrifice taking an employee below the national minimum wage, especially where salary sacrifice is being used by an employee for more than one benefit. Schemes already in place should be reviewed whenever changes take place around the national minimum wage. The same is true of the new national living wage, for workers aged 25 and over, which will take effect from April 2016.
Through communications, employees should also be made aware that a reduction in their salary could affect other benefits, such as pension contributions, and things such as mortgage applications, for example.
Running the scheme may also result in extra administration, with scheme details and administration potentially requiring an update whenever tax changes occur, especially in terms of changes to value-added tax (VAT), NICs or BIK taxation. Scheme providers should be able to help with these administrative details.