How Does A Salary Sacrifice Car Scheme Work?

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What are the main drivers for implementing a salary sacrifice car scheme at your organisation? And how does a salary sacrifice car scheme work exactly? Read our introduction to salary sacrifice car schemes below and see how it could benefit your business and your employees.

Salary Sacrifice Cars: How Does It Work?

A typical example of how a salary sacrifice car scheme works is very simple. An employee agrees to surrender a certain amount of their gross salary each month in return for the provision of a fully expensed lease car.

This works in much the same way that a salary sacrifice scheme works for any other eligible employee benefit, be it the provision of childcare vouchers, private medical cover, cycle-to-work schemes and many more.

Salary sacrifice and tax savings: How does it work?

One of the main drivers for a salary sacrifice car scheme is the tax savings that can be created for the employer and employee.

The major saving arises for the employee because they no longer pay tax and national insurance (NI) on the earnings that are being sacrificed. Instead, they pay income tax on the benefit-in-kind of the car, but if they choose wisely, the employee should be able to make substantial savings by offsetting one against the other.

For the employer, savings arise in the reduced NI and corporation tax on the earnings sacrificed and the Class 1A NI arising on the benefit-in-kind. The employer can make another saving by recovering 50% of the VAT on lease and maintenance costs.

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Implementing a salary sacrifice car scheme

Overall, a car salary sacrifice scheme is straightforward to introduce, and offers employers a low-cost option to reward staff.

However, before implementing a typical salary sacrifice car scheme, employers must understand the facts in order to build an internal business case. One of the most important factors is that schemes are normally cost-neutral for the employer.

Another is that scheme’s provider should be able to manage all aspects of car maintenance, including servicing, breakdown cover and insurance, and handle ongoing communications about, for example, driver and car safety.

Correct documentation from a legal and tax compliance perspective is essential and should again be forthcoming from the scheme provider, who should also secure HM Revenue and Customs (HMRC) approval for the scheme.

The best example of a salary sacrifice car scheme also helps to meet an organisation’s green agenda as well as cutting organisational costs.

Green car take-up

How do salary sacrifice schemes work in relation to your environmental responsibilities?

Salary sacrifice car schemes are based on tax-efficiency and lean towards cars that are more fuel-efficient and greener, as they attract the lowest taxes.

Low CO2 emission cars are best suited to salary sacrifice schemes as they mean that employees’ tax bills are lower, and the numbers of available models are increasing day by day. As emission laws become stricter, the pool of greener cars should continue to grow.

Drivers need to be aware, however, that company car tax went up by 2% in the tax year 2015/16, and it increases by the same amount for each of the next three years for all cars emitting more than 75g/km of carbon dioxide.

And the rate will increase by a further 3% in 2019-20, giving a total rise of 11% in four years.

By selecting cars with low carbon emissions now, drivers can try to keep their bills as low as possible in the future, and it’s a simple equation: the lower the car’s carbon emissions, the lower the corresponding tax bills.

How to set up salary sacrifice at your organisation

When implementing a typical example of a salary sacrifice car scheme, communication is vitally important and the best way for employers to boost take-up of the scheme is regular communication to staff.

Communication methods could include a benefits portal, an intranet, a staff magazine or e-newsletter, email bulletins, roadshows, forums, posters, payroll communications and open days.

There are two major reasons why employers have to get their communications correct.

Firstly, so company employees are fully aware of the scheme details and understand the implications, while regular communications will help keep the salary sacrifice car scheme fresh in employees’ minds.

However, there is also a duty of care for the employer to let staff make informed decisions.

Employers should clearly inform employees of how the salary sacrifice scheme works and that they are giving up salary and are getting a benefit for it. Your employees should also be informed that this could impact other things, such as tax credits and their state pension entitlement due to reduced National Insurance Contributions.

How does car salary sacrifice work when someone leaves?

With your company salary sacrifice scheme, there will be a few contingencies to watch for. In any example of a salary sacrifice car scheme, two major issues that should not be overlooked by employers relate to parental leave and the cost of early termination.

When an employee goes on maternity or paternity leave, the employer is contractually obliged to continue to provide all the benefits of a salary sacrifice scheme, despite the possibility of an absent employee suffering a significant drop in salary, or even being on unpaid leave.

Employers can plan for such an eventuality by building contingencies into their salary sacrifice car policy, such as contingency funds to cover any costs incurred.

With most schemes, if an employee leaves they give up the car and the employer would need to return the car to the leasing company and pay the early termination fee.

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The fact that company cars are more widely available throughout an organisation because they can now be accessed through a salary sacrifice scheme is also of considerable benefit to an employer – especially in those industries where staff recruitment and retention is a significant factor.

Now that you know more about how salary sacrifice works, you may well want to introduce such a scheme to your organisation in order to boost employee retention or as a tool to more closely monitor your environmental responsibilities.

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