Buyer’s guide to salary sacrifice car schemes

Salary sacrifice car schemes are growing in popularity among employers, with low-emission cars becoming an increasing priority for employees.

Car buyers guide

The facts:

What is a salary sacrifice car scheme?

This is a car scheme in which an employee forgoes a portion of their gross salary in exchange for the use of a car for a period of time, and receives tax and national insurance breaks as a result.

Where can employers get more information?

The Association of Car Fleet Operators (ACFO) can be found at or read more at

Who are the main providers?

ALD Automotive, Alphabet, Fleet Evolution, Fleet Hire, Hitachi Capital, Inchcape Fleet Solutions, Leasedrive, LeasePlan UK, Lex Autolease, Novalease, Pendragon Contracts, SG Fleet, Tusker, Venson Automotive Solutions and Zenith.

According to the Employee Benefits/Towers Watson Flexible benefits research 2014, published in April, salary sacrifice car schemes are the most popular benefit that employers plan to add to their flexible benefits plans.

Some 22% of respondents plan to add this perk to their plans, with 10% intending to include low-emission cars in their schemes.

Currently, 18% of employers offer salary sacrifice cars with 11% offering low-emission cars through their flex plans. 

These schemes are attractive to employers because they are typically cost-free for the business, with most providers able to manage all aspects of car maintenance, including servicing, breakdown cover and insurance, as well as ongoing communications about, for example, driver and car safety.

This arrangement can also enhance the corporate social responsibility (CSR) strategies of an organisation, and help employers to meet their duty-of-care requirements by eliminating ‘grey fleet’ risk, where privately owned cars are used for ‘at work’ mileage.

Funding options

Salary sacrifice schemes are underpinned by various fleet funding options, which employers should fully investigate prior to introducing a car scheme . Options include: contract hire, contract purchase, finance lease, employee car ownership, hire purchase and outright purchase.

Historically, outright purchase was the most popular fleet funding method, but over the past 20 years this has been overtaken by contract hire, which is now the most common form for salary sacrifice arrangements.

However, each funding option has a number of advantages and disadvantages, depending on the nature and needs of an organisation.

National insurance savings

Employers can also benefit from thenational insurance (NI) savings made by deducting employees’ car payments from their salary. Many organisations choose to reinvest these savings back into their car scheme in order to make the benefit even more attractive to employees.

For staff, salary sacrifice car schemes are a cost-effective way to invest in a car, and not only because of NI savings. They can also reduce the level of tax they pay by choosing a low-carbon dioxide (CO2) emission model.

This is because company car tax is based on a car’s CO2 emissions. The value of an employer-provided car (which must be reported under P11D), meanwhile, takes into account the manufacturer’s recommended retail price and VAT, and an employee’s personal tax rate.

Tax rates for company car CO2 emissions

As part of the government’s ongoing efforts to reduce the UK’s CO2 emissions, it has introduced low-emission company car tax rules.

In 2017 the appropriate percentage of list price for company cars subject to tax will increase by two percentage points (to a maximum of 37%) for cars emitting more than 75g of carbon dioxide per kilometre (gCO2/km).

In 2017-18 there will be a four percentage point differential between the 0-50 and 51-75 gCO2/km bands, and between the 51-75 and 76-94 gCO2/km bands.

In 2018-19 this differential will reduce to three percentage points. This will reduce by a further two percentage points in 2019-20 in line with the 2013 Budget announcement.

The most recent change to benefit-in-kind (BIK) tax structure, in April 2014, also saw the low tax band of 5% applied to all cars emitting 50g/km of carbon dioxide (CO2) or less.

Accordingly, company car providers are offering lower-emission cars to correspond with these tax breaks, with providers seeing a decrease in the average CO2 emission levels of cars being ordered.

The Company car trends research, published by GE Capital’s fleet services division in August, found nearly two-thirds (62%) of respondents cited a carbon dioxide emissions limit as the top criteria for employee company car choice .

Electric cars also continue to be an option, but only 16% of respondents would consider it as their next company car, according to research published by Leasedrive in March 2014.

Salary sacrifice scheme burdens

Complications can occur in a salary sacrifice car scheme if an employee goes on long-term sick leave and cannot keep up the repayments on their car, or if an employment contract is terminated, be it through an employee moving on or being made redundant. This may result in an employer having to meet the outstanding costs of the car scheme.

Introducing a car salary sacrifice scheme can also bring extra administration for employers, especially when tax changes occur. Employee contracts will need to be updated in relation to any increase in VAT or NI contributions. However, providers can help organisations work through these administrative details.

A growing employee benefit

Estimates for the number ofcars covered by salary sacrifice schemes vary, but a realistic figure would be 50,000-75,000, and this is expected to grow in coming years.

The number of providers has also increased significantly and recent focus has been on the ‘employee experience’. Many suppliers are concentrating on making schemes as simple and user-friendly as possible, from the initial promotion of a scheme, through web-based quotation processes, order and delivery, to service, maintenance and repair services.

Overall, it is a cost-neutral method of enhancing the value of an organisation’s total reward package and can help to both attract and retain employees.

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