Andrew Baxter, Hitachi Capital business development manager, looks at what's required of a successful salary sacrifice scheme.

Salary Sacrifice works by allowing eligible employees to give up part of their salary under their terms of employment, in return for their employer providing a non cash benefit such as the use of a new car. Gross salary and cash allowances are usually subject to both Income Tax and National Insurance Contributions (NIC). By 'sacrificing' part of this gross salary for a new car, this element will not be subject to Income tax or National Insurance, resulting in lower tax and National Insurance being paid overall by the employee (and lower NICs paid by the employer) each month. This means both the employer and employee can benefit from a Salary Sacrifice scheme.

For employers Salary Sacrifice schemes – if designed, introduced and managed appropriately – can generate a number of benefits. Firstly these schemes can be cost neutral to employers – or even save them money – as well as offering a valuable employee benefit which can help staff recruitment, motivation and retention. It also helps employers address the 'grey fleet' issues associated with employees using their own cars on company business, which ultimately will improve an employer’s overall duty of care and legal compliance. It also encourages the choice of lower emission cars, which supports Corporate Social Responsibility.

For employees this means cost effective access to a new car – a valued employee benefit. This is usually provided on an all-inclusive basis – including for example maintenance, insurance (including business use) and roadside assistance - and so provides peace of mind driving. In addition the employee takes advantage of any car manufacturer discounts offered to provide further savings. This means significant savings to employees can be made under Salary Sacrifice.

Sacrificing a percentage of annual salary for a non-cash benefit is widely accepted, such as with the use of childcare vouchers. However, when applied to cars, HMRC consider this a taxable benefit, which is subject to Benefit-In-Kind tax (BIK). It is important that this is understood by the employee.

The key to Salary Sacrifice success is to ensure that the scheme is appropriately designed initially, and to promote employee take-up through on-going, informative and balanced marketing which is engaging to the specific employee base. It is important that employees understand the costs and benefits, both personally and for their employer. Demonstrating how both the company and the employee will save is critical and inspires confidence in the offer.

Key information for employees – the marketing messages - should be comprehensive and jargon free, clearly explaining the pros and cons of the scheme to the employee. Offering all of the information in one location, such as a dedicated webpage or portal, will also support easier, convenient and informed decision making.

There are risks in Salary Sacrifice schemes from an employer perspective, but due diligence and appropriate scheme design before implementation, followed by good management throughout, can minimise and mitigate most if not all of these. When designing the scheme, addressing the key issues that could be faced – such as early scheme leavers, maternity periods, long-term sickness or other absenteeism - is key to success. Salary Sacrifice may also not be suitable for certain organisations, such as those with a high staff turnover or those employing a high proportion of low paid employees as the Salary Sacrifice cannot take an employee’s salary below the National Minimum Wage. Professional advice and guidance should always be sought when considering Salary Sacrifice schemes.

Hitachi Capital research - covering almost 3,000 vehicles from multiple customers - has revealed most schemes are cost neutral or even provide substantial savings for businesses by reducing employer contributions to national insurance.

Giving employees clear and relevant information – including the costs and benefits – will support informed decision making and is key to employee buy-in and success of any Salary Sacrifice scheme.