The pros and cons of car salary sacrifice

Demand for car salary sacrifice is growing as an increasing number of companies offer the benefit to their employees.

According to data from the British Vehicle Rental and Leasing Association, the salary sacrifice car fleet has risen 68% in a year to nearly 62,000 cars. Many companies have launched salary sacrifice in addition to their company car scheme, to give all eligible employees access to new cars through the business.

So, what is attracting so many companies to introduce salary sacrifice car schemes to their drivers? And are there any potential pitfalls?

Here, we take a look at what salary sacrifice has to offer and reveal any potential downsides for drivers and employers.

Seven great benefits of a salary sacrifice car scheme

1. Salary sacrifice can improve employee satisfaction

Salary sacrifice is a great employee benefit and not one that is restricted to company car drivers. A business can offer salary sacrifice to any employee who qualifies for the scheme as part of the general benefits package. This enables employees at all levels of the business and in all departments to gain access to a new car.

2. Employees can save money by opting for salary sacrifice

Salary sacrifice is designed to save employees money. Once a car is chosen, there is no initial rental to pay; employees just ‘sacrifice’ regular sums from their pre-tax salary and, in return, receive a new car over an agreed timescale and mileage. Savings are achieved because employee spending power is boosted with funds that would otherwise have been lost in tax and National Insurance Contributions if received as salary. Employees have to pay company car tax on the benefit, but by choosing an electric car, the actual tax paid can be much less than £20 a month. Overall, the tax and NIC saved should outweigh the company car tax bill, so an employee can pay less for a new car than if they paid for a leased vehicle privately.

3. Salary sacrifice can save companies money

Companies pay Class 1A National Insurance Contributions on employee salaries. So, if employees are reducing their salaries to pay for a new car, this also reduces the amount of Class 1A NICs that companies have to pay. The amounts vary according to how much salary is sacrificed and the tax band of the employee, but there are thousands of pounds worth of potential savings for each car on the scheme. Salary sacrifice providers offer detailed calculations for customers showing just how much employees and employers can save, including potential fuel cost savings from switching to electric energy. Businesses can then decide whether to retain the savings or use them to fund investment or additional employee benefits.

4. Salary sacrifice schemes can cut vehicle emissions

Salary sacrifice customers tend to drive the cleanest cars, with a very high take-up of electric vehicles. This is because electric cars maximise the savings employees can make. As a salary sacrifice car is classed as a benefit, it incurs company car tax. Drivers will pay tax on a percentage of the car’s value, which is based on its emissions band. Drivers of clean electric cars pay tax on 2% of the car’s taxable value, compared to a typical petrol or diesel which would sit in the 20-28% band (although the tax bands reach 37% for the most polluting cars). Choosing an electric car saves money and can help employees meet their Environmental, Social and Governance aims.

5. Salary sacrifice schemes can adapt to changing employee needs

Salary sacrifice suppliers have thought of everything when it comes to providing schemes that are flexible to changing employee needs. Cars are provided through a lease arrangement, which means drivers can personalise their mileage terms and decide how long they want to keep the car. There is also built-in insurance and there are services to prevent any issues if employees leave or take extended time off, such as for parenthood.

6. Support backup for salary sacrifice customers

Salary sacrifice schemes come with customer support built-in, so that managers and drivers can always find the information and help they need online or on the phone. Salary sacrifice providers focus on managing all the elements of the scheme, so the business can just offer a great benefit, knowing that drivers will be well looked after once they choose their new car – usually through an online portal showing which vehicles are available and the overall cost to the employee in terms of salary forgone.

7. Salary sacrifice can reduce grey fleet risks

Salary sacrifice enables every employee to have access to a clean, safe, new car. This means that if someone needs to use their car for occasional business mileage, the company can be certain it is fit for purpose and well looked after. Salary sacrifice providers ensure vehicles are taxed, serviced (thanks to built-in maintenance agreements), and correctly insured, with expert teams on hand to manage on-road issues in the event of a breakdown.

Five issues to consider when looking at a salary sacrifice car scheme

1. The paperwork involved in a salary sacrifice car scheme

The concept behind salary sacrifice schemes is simple, but behind the scenes, there is much complexity. Employers need to ensure the scheme is compliant with tax rules while keeping detailed and accurate records. They also need to ensure employees are fully informed about how schemes work and relate to their personal finances. The business must also understand and manage employee risks relating to minimum wage, sickness, parenthood cover, and people leaving the business. Once a car is delivered, the business will need to provide updates to HM Revenue and Customs so that employees’ tax codes can be altered and vehicle information can be used to accurately calculate their company car tax bill. This means it is vital to find the best salary sacrifice partner to run the scheme so that administrative tasks are taken care of, and the whole process runs smoothly.

2. A salary sacrifice scheme is only as good as the provider

The quality of any salary sacrifice scheme will depend on the performance of the provider behind the benefit. They will be involved in everything, from marketing and open days to road tests and customer service. This means it is vital to assess the market and choose suppliers that can prove they have high levels of customer satisfaction and a responsive team who are ready to resolve any queries or issues. Choosing the wrong provider can cause business headaches, particularly if drivers are upset with the support and service they are receiving or if there are errors in paperwork.

3. Drivers may incur recharges when they return a salary sacrifice car

Drivers need to be aware that there will be penalties if they do not look after their cars and hand them back in poor condition. Salary sacrifice schemes are designed to save money, but the monthly payment set by the vehicle provider is based on the car’s predicted value when it is returned. Should panels be damaged with scrapes and dings, or the interior torn and broken, then the car will be worth less than expected and need repairs before it can be sold. Drivers will be charged for this damage. The British Vehicle Rental and Leasing Association provides a Fair Wear and Tear Guide setting out a standardised way that the industry assesses vehicle damage. Furthermore, drivers need to keep within the mileage they agreed in their contract, otherwise they could face excess mileage charges.

4. A car salary sacrifice scheme is not suitable for everyone

Some employees won’t be suitable for a scheme. For example, some may find that the scheme would reduce their salary below the minimum wage. It may also not suit those on fixed-term contracts or employees who are considering retiring, as they will be signing up for a long-term commitment with the leasing provider.

5. Favourable salary sacrifice legislation may not last forever

Governments change, and so does legislation, so employers need to be aware that the current system may not last forever. There are no indications of imminent change to salary sacrifice rules, while company car tax rates for electric vehicles are set out for the next four years. However, employers should obtain regular updates from the industry to ensure they are fully prepared for any adjustments to the way schemes work.