Salary sacrifice schemes allow employees to give up a portion of their income before tax in return for a company car. These cars can be funded by the company through a number of methods, but contract hire is the most common.
The majority of contract hire companies are now already offering salary sacrifice schemes or are about to launch such schemes.
Through a salary sacrifice arrangement, employees pay for a car out of their gross salary, so save on income tax and national insurance (NI) contributions.
However, company cars still attract Benefit-in-Kind tax and this is true for salary sacrifice schemes.
Salary sacrifice works best when sacrificing salary for a low emission car, as these attract the lowest rate of Benefit-in-Kind tax.
As a result, interest was triggered by the emergence of an increasingly large range of low emission vehicles from manufacturers.
Therefore, salary sacrifice is financially most attractive on sub-120g/km cars, as these produce the most attractive BiK savings for employees and NI and corporate tax/capital allowance savings for employers.
There is a growing trend for companies to replace their entire company car scheme with salary sacrifice schemes.
However, it is still considered that salary sacrifice is a HR benefit for the entire workforce.
Employers must pay close attention to employee contracts which may require amending to allow for the salary sacrifice schemes.
- Pros: vehicles can be offered at no cost to employer; and offer potential savings to the employee. More manufacturers are offering financial reductions and more large contract hire companies are now offering salary sacrifice schemes.
- Cons: employer needs to cover all potential risks such as early termination and maternity leave costs; and the scheme could be expensive if tax rules are changed. Uptake can be low and schemes require marketing within a company to ensure enough employees adopt the scheme to make it worthwhile.