Key considerations for salary sacrifice car schemes

In difficult economic times, offering employees who would not normally have access to company cars the ability to lease or hire a new car through a salary sacrifice scheme, with all the associated tax and national insurance (NI) savings, can be an attractive employee benefit.

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  • A car salary sacrifice policy may include an early termination fee to be paid by the employee.
  • Employers can add a premium to cover any exit penalties.
  • Employers are obliged to continue to offer the same level of benefits to staff on maternity or paternity leave.

But it is an area fraught with danger for unwary employees, particularly when it comes to signing up to a long-term agreement and then leaving the organisation while still under contract.

Most agreements will include an early termination fee to be paid by the employee, but there is a significant risk for employers too, says Mo Desai, director of the employee solutions team at PricewaterhouseCoopers. “Depending on the size of the early termination charge, an employer may still be left with a shortfall even if it deducted it from [the employee’s] final net pay,” he says.

“If an employee disappears and [the employer] is not able to track them down, ultimately the contract is between the employer and the leasing company and the employer will be responsible for the early termination charges.”

Employer protection

Employers will often look to take out insurance to cover any termination fees incurred after an initial period, usually six months, says Andrew Leech, director of Fleet Evolution, which specialises in providing salary sacrifice cars to smaller firms. “This is generally added to the employee’s bill, so after six months the car can simply be handed back without any penalty,” he says.

This tends to add about 5% to the cost of schemes, but it is still a cheaper option for employees than taking out a car privately, says Leech.

Many employers will build their own pool of money by adding a premium to cover any exit penalties, says James Warwick, a partner in Deloitte’s employment tax team. “Employers need to look at a whole-life calculation which factors in all the tax costs as well as the obvious costs, such as leasing the car and insurance,” he says.

“Then they can just take that figure and increase it a bit. It doesn’t have to be very much per employee, per car, per month, but it can even out those costs among all employees without anybody really feeling any pain.”

Other options include offering the employee the ability to buy the car outright or the employer trying to reallocate the car to another individual, says Andrew Hogsden, senior manager, strategic fleet consultancy at Lex Autolease.

But compulsory redundancies are a different matter, he says. “In that situation, it’s normal for the employer to pay any fee on behalf of the individual.”

Maternity and paternity leavers

Employees taking maternity or paternity leave can also cause complications. Where an employer provides more than the statutory minimum leave, payments can often carry on as before, but if this is not the case, the employer will be unable to make salary deductions, yet is obliged to continue offering the same level of benefit during the period of leave, says Desai.

“When an employee enters into a salary sacrifice arrangement, they are renegotiating the contract of employment, and the car becomes a contractual benefit,” he says.

Insurance can also be an option here, but this is not always taken out because it can prove unpopular among staff who are unlikely to be affected, says Leech. He suggests employers retain about ÂŁ15 a month from NI savings to cover such eventualities.

Retirement impact

Care must also be taken around employees approaching retirement, to ensure any deductions do not adversely affect pension contributions or provisions based on their salary when they retire.

Most, but not all, pension schemes will allow employees and employers to make contributions and receive payments based on notional rather than take-home salary, says Desai, but he warns employers to keep an eye on this as they make changes to pension schemes because of auto-enrolment.  

Despite these potential obstacles, salary sacrifice company car schemes can be an attractive option for both employers and employees, says Deloitte’s Warwick. But care must be taken to ensure clear policies are set out, and communicated, when a plan is introduced.

“There is quite a lot of complexity and thinking to be done upfront,” he says. “It’s the [employers] that don’t work through all the scenarios that tend to come unstuck.”