Is it worth launching a car salary sacrifice scheme?

Is it worth launching a car salary sacrifice scheme?

Posted by

Charlie Strand

April 2024

Salary sacrifice is an increasingly popular way of giving all qualifying employees the opportunity to source a new car in a cost-effective way.

It allows participants to pay for a car lease with their pre-tax salary, so they can fund their new vehicle with money that would otherwise have gone to the taxman.

This makes it an attractive additional choice in a growing array of salary sacrifice benefit options offered by employers to staff, ranging from electric bikes to mobile phones and nursery care.

It is also much more cost-effective than offering cash. When benefits are paid as salary, the amount that reaches the employee is significantly less than the cost to the employer once tax and National Insurance payments are taken out.

What’s more, with salary sacrifice the company also saves money as its Class 1A National Insurance Contributions are reduced.

Class 1A NIC is calculated on a percentage of an employee’s salary, so there is less tax to pay if they are sacrificing some of their gross pay. Savings can add up to thousands of pounds per car in a salary sacrifice scheme during a typical three or four-year car lease contract.

What about company car tax?

Salary sacrifice cars do incur benefit in kind tax. Employees pay tax on a percentage of the vehicle’s value according to its CO2 emissions, from 2% for electric cars to 37% for the worst polluters.

As a result, electric vehicles are the best way to ensure a driver’s tax and NIC savings are not offset by a large benefit-in-kind bill. For many electric cars, the amount paid in benefit-in-kind is currently as little as £9 a month (depending on your marginal rate of tax), which is more than covered by the income tax and NIC savings.

So, from a financial perspective, a salary sacrifice car scheme is definitely worth it, both for employee and employer.

Also, as more drivers are adopting electric vehicles, transport emissions are reduced, including for any ‘grey fleet’ drivers who make business journeys in their own vehicles. They will now be travelling without creating tailpipe emissions, while from a risk management perspective, fleet managers can be certain staff are in a car that is safe, reliable and properly insured.

Things to consider when setting up a salary sacrifice car scheme

Firstly, setting up a scheme requires extensive due diligence and careful checks on supplier partners to ensure everything will run smoothly in the long term.

It is important to get processes and policies correct from the outset and work with all departments and suppliers who are involved so that everything operates smoothly when the scheme is introduced. This will need to include items such as Early Termination Insurance (ETI) should an employee wish to leave the business before the end of the car lease period.

Secondly, to ensure the scheme is a success, companies will need to work on marketing the salary sacrifice car offer and raising awareness. This may range from distributing emails and hosting driving days to educating employees about how salary sacrifice works and answering technical questions about the scheme, such as company car tax and how savings are calculated. Much of the work may be done by the salary sacrifice supplier, but managers need to be on hand to facilitate any initiatives.

Finally, the business must monitor and manage customer service levels, as administrative errors or poor performance by scheme providers could impact employee morale. This is especially important when circumstances change, such as when employees leave or have a long-term absence, either through illness or parenthood.

Therefore, it is vital to choose a salary sacrifice supplier that can be trusted to deliver in the long term. The supplier should offer expert customer support and have a reputation for providing great service.

Despite potential challenges related to setting up and running a salary sacrifice car scheme, it is definitely worth the effort and time involved if the scheme offers savings for a business and its drivers.

With the right programme in place, drivers get more for their money, and employers have a cost-efficient benefit that will enhance employee satisfaction and encourage new staff to join the company.

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