Fleet News

Salary sacrifice: what you need to know before November 23

By Jon Lawes, managing director, Hitachi Capital Vehicle Solutions

On August 10 2016, HMRC announced the launch of a consultation into the provision of company cars under popular salary sacrifice schemes and alternatives where employees can opt for a cash sum. The aim of the consultation? To reduce the cost of such schemes to the Exchequer and address the “unfair advantages” given to employees who have access to the schemes over those who do not.

Indeed, due to the attractive tax savings to be had, the popularity of salary sacrifice has rocketed in recent years; Pay As You Earn (PAYE) requests from employers, who offer the incentive to employees as a way to reward and retain staff, increased by a third from 2009/10 to 2014/15.

To the detriment of the Exchequer’s pocket, this increased surge in demand has brought with it many positives – both environmentally and for the automotive industry as a whole.

It has been a factor in increasing new car sales and in turn driving revenue for manufacturers. In fact, OC&C predicts that by 2025, cars funded by these schemes will account for 10% of all new car sales. It has also made access to vehicles more affordable for public sector workers who, in some cases, might not otherwise be able to afford them.

But perhaps more importantly, it has promoted a move toward environmentally friendly low-emitting cars. A typical, brand-new, salary sacrifice vehicle replaces a 5-7 year old car. This supports new car sales and gives access to safer, greener and newer cars for employees.

New proposal

The government’s new proposal is that, from April 2017, the benefit in kind tax for a car taken under a salary sacrifice arrangement will be based on the higher of the (current) Co2 based figure or the gross cash sacrificed.

The move would be very much to the detriment of the green car agenda that, until now, has been actively pushed by the government with the support of the fleet industry. 

If the proposal goes ahead, organisations will need to review their current arrangements for offering employees a car alongside the option of taking a cash alternative. Although we will not know the exact outcome of the Consultation until the Autumn Statement, if implemented ‘as is’ organisations will need to update their policies before 6th April 2017 - to closer reflect the organisation’s mobility needs whilst still mitigating any negative impact from a cost and choice perspective.

As the industry eagerly awaits the outcome of the consultation due to be announced on 23rd November during the Autumn Statement, the future for salary sacrifice remains unclear. What we do believe is that the government has three potential options;

  • The first being that cars will be removed from the salary sacrifice consultation in the same way that pensions and childcare vouchers have been. This will continue to promote the green car agenda and is, with little exception, regarded as the preferred option for the automotive industry.
  • The second option would be that HMRC go ahead as planned but legislate that the rules are grandfathered, meaning only employees taking a vehicle after 6 April 2017 will be affected. Those selecting cars after this date will be making decisions given the new rules and those on a current scheme would be unaffected.
  • Thirdly that HMRC go ahead as planned. In this case many employees who currently take a car under salary sacrifice will face an increased tax cost over the next two years; a cost that could range from hundreds to several thousands of pounds with those taking expensive, low-emitting cars and who pay the 40% tax rate being worst hit. The result? People are discouraged from ordering greener cars and the industry ends up with further complications.

Despite the current uncertain future of the schemes, the consultation by no means spells the end of salary sacrifice for company cars as a product. Many drivers chose their cars because of their affordability on a monthly basis, whether or not this results in a tax saving.

Whatever the outcome on November 23, leasing firms like Hitachi Capital and manufacturers alike, have a duty to ensure that customers are fully informed and advised on the possible outcomes of the consultation. This includes advising clients that current rules are set to reduce the financial viability of car salary sacrifice over time due to benefit in kind rates rising at an accelerated rate.

It is the responsibility of the industry to push forward and create alternative, affordable products for customers so that access to low-emission vehicles can become affordable for all and that 24th November means business as usual for customers.

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