Cash allowance

A cash allowance scheme is easy to administer, which is its main advantage, but complications include difficulty in policing the scheme, environmental concerns and the image of the car and whether it reflects that of the company.

“Cash allowances provide flexibility for the driver – they can choose whether they want to buy or lease a new car or a used car,” says Andrew Kirby, commercial director – employee benefits schemes at Zenith .

“However, they do not get the benefit of tax efficiencies and other cost savings through the all-inclusive package and enhanced discounts that can be delivered through a company car scheme.

"They may also miss out on the hassle-free service a leasing company should be able to provide.

“In addition, cash allowances can give rise to duty of care problems as grey fleet drivers are difficult to control from a risk perspective. Are the cars being driven for business use and, if so, are they properly maintained, insured and has the licence been checked?

"And cash allowances can end up being more expensive for high mileage drivers if companies reimburse private fuel,” he says.

Many companies have moved back into company cars from cash allowance because of the risks.

This is particularly true of a sales force, who may be off premises from one week to the next.

“You may never see the car, so you wouldn’t know whether the tyres are road legal, whether it’s got an MOT certificate, if the driving licence is valid, how many points they have,” says Mark Morton.

“Where there is a fleet provider, they might do a lot of those checks and balances for you but if you provide cash, you’re going to have to manage that at employer level.”

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Salary sacrifice

With salary sacrifice, the driver sacrifices a monthly amount from their wage to pay for a car. The sum is deducted before tax and covers the car, maintenance, insurance, administration - in fact, everything except fuel, for which they put in a claim if they do business mileage. The employee pays lower income tax and national insurance contributions (NIC) on the remaining salary and pays BIK on the car.

The cost savings to the company are lower NICs because they are based on the value of the vehicle rather than on income tax.

While an employee is liable for benefit-in-kind tax, this amount is almost always outweighed by the tax and NIC savings they’ve achieved through sacrificing their salary,”  says Iain Carmichael, chief commercial officer at Tusker.

Employers can save approximately £300 in NIC per car per year, while employees can save an average of £900 a year in tax and NIC, he adds.

Fleets can put a CO2 cap on purchases to shore up their environmental credentials. 

Carmichael says salary sacrifice schemes are seen as a valued employee benefit which the employer can use as a way to attract, retain and motivate staff.

“It’s also a useful approach to managing the grey fleet through providing services such as driving licence checks, full maintenance of vehicles and insurance,” he says.

In addition, salary sacrifice is generally of no cost to the employer.

For the employee, there can be considerable savings over the cost of buying the same car from a dealership: “Lease companies are passing on corporate discounts and levels of manufacturer support that you and I, as individuals, would not ordinarily get. Savings can be as much as £1,000 a year,” says Mark Morton.

It is also a tremendous draw when it comes to retention and recruitment. Ernst & Young moved to salary sacrifice for all staff two years ago. “It has gone down very well,” he says. “Take-up has been lower than ideal, I think, because of the economic situation but before, only staff over a certain grade could have a car, now, anyone can have one.

“The real attraction is for graduates, when we’re competing with our competitors for the best talent. We are saying, if you join us, your salary will be X and we’ve got this list of options so that you can flex your salary for pension, holiday, even a car and then you can use that car to get to and from your appointments and choose a vehicle that fits with what you want to do at the weekend. It is a really good motivator and attraction tool,” says Morton.

However, salary sacrifice is not suitable for all employees, some of whom might not qualify due to minimum wage checks or insurance restrictions. Also, as an employee’s salary is reduced, this could have implications for salary-related benefit payments such as final salary pension.

“We wouldn’t recommend it for employers who have a particularly high rate of attrition in terms of staff turnover,” says Andrew Hogsden, head of strategic fleet consultancy at Lex Autolease. “Staff will leave and the company has still got the car and the contract term to run. There would be early-termination costs.”

Companies that run salary sacrifice schemes through novated leases, rather than master contract hire, are relieved of early-termination penalties.

David Fernandes, managing director of SG Fleet, is a firm advocate. “With a novated lease, the provider contracts direct with the employee and if the employee leaves the company, the vehicle goes with them,” he says.

Credit checks are a must. “We check whether potential salary sacrifice employees can afford them,” adds Fernandes. “It is very straightforward: when we do a quote, we need to know what their cash position is going to be afterwards, so we ask them to tell us what their liabilities are – house, loans, expenses, etc. The last thing an employee should be doing is getting a car through this scheme when they cannot meet their other commitments.”

 

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Read on for case studies and how to implement the switch...