It makes sense as part of a benefits package, but fleets considering switching from ECO or cash must look at pros/cons, says Catherine Chetwynd.
On initial inspection, salary sacrifice appears to be the Holy Grail: tax efficient, an excellent way to enhance an employee benefits package, adds strong recruitment and retention appeal and can improve environmental credentials.
However, it is not a panacea and any fleet that is considering moving to it from either employe car ownership (ECO) or cash allowance schemes should consider all the options carefully. In fact, ECO, cash allowance and salary sacrifice all have pros and cons and are largely aimed at different audiences, which means they are not mutually exclusive.
ECO schemes originated in response to benefit-in-kind becoming CO2-based in 2002, providing a managed way for employees to own vehicles and avoid high BIK.
The employee leases the car from a supplier who provides a package that includes car, maintenance, insurance, accident breakdown cover, insurance against being made redundant, etc.
It is an efficient way of funding a car for those who do high business mileage. These cars are not subject to BIK, as HMRC recognises that they are owned by employees, so drivers can claim AMAP rates of 45p per mile up to the first 10,000 miles and payments are not subject to tax.
As a way of avoiding BIK, ECO worked a treat, although because emissions have since dropped dramatically, the tax burden to the driver of owning a company car has considerably reduced and running costs, in particular fuel, have increased.
“An ECO is a packaged solution, so you know you are managing risk: people are driving cars that fit your corporate profile and you can put policy around it that says no two-seaters, no soft tops, etc.,” says Mark Morton, director, human capital, for Ernst & Young .
“And you can drive the green agenda by putting limits on emissions. The employer has control over the fleet and employees can choose cars to their liking.”
However, it is labour-intensive to administer and explain to drivers (although that can, in part, be overcome by a good lease provider) and ECO is proportionately worse value for lower mileage drivers. In addition, there can be high early termination costs, should the driver leave in the middle of the contract.
Read on to discover more about cash allowance and salary sacrifice schemes...