Salary sacrifice schemes see big surge in interest

An increasing number of businesses are bolstering employees’ benefits packages by giving thousands of staff access to a company car for the first time.

Traditionally, salary sacrifice schemes included the likes of childcare vouchers, gym membership and subsidised bikes.

Now companies are starting to allow employees to relinquish part of their gross salary in return for a car.

Employees gain through savings in income tax and National Insurance Contributions (NIC), while the employer benefits from NIC savings.

According to experts, companies don’t need a high take up by employees to make the scheme work.

Tusker bases its figures on 2-3% of staff joining in the first year, followed by another 1% in years two and three.

Zenith Provecta is more bullish: it forecasts 8-10% take up in the first year, rising to 40% by year three.

Masterlease, which has been offering salary sacrifice for nine years, says its best result is a 15% take up; more typically it achieves 1-2%.

Large and small companies can benefit as long as the scheme is tailored appropriately. For instance, smaller companies should consider restricting manufacturer choice to achieve bigger discounts.

Zenith offers its scheme to 45,000-plus employees at five companies. More than 1,000 people have so far signed up, each saving on average more than £2,300 compared to buying the car themselves.

It expects to have 10 schemes live by April. Chief executive Andrew Cope says: “In the main they are companies that opted out from cars into cash, but they are now coming back to cars via salary sacrifice.”

Meanwhile, Tusker’s recent deal with North Yorkshire County Council will see it offer cars to 30,000 public sector employees. It expects a take-up of 500 vehicles in the first year of the four-year contract.

“We have been absolutely staggered by the amount of interest and this is growing by the week and month,” says Tusker managing director David Hosking.

The company is in discussions with a number of public sector bodies and Government organisations, which are looking to introduce schemes this year.

“We are also in the final process of agreeing formal strategic relationships with two of the largest accountancy firms in the UK,” adds Hosking.

Schemes need to be constructed correctly, with sufficient information available to employees to make considered decisions about choosing a car, including benefit-in-kind tax changes in the future, and safeguards against early termination.

These could include insurance protection with costs passed onto the driver or a termination charge of, for instance, several months of the sacrified salary.

It is difficult to quantify the level of earnings where the scheme loses its financial appeal, but Ben Creswick, new business manager at Zenith Provecta, says: “We have usually seen a salary level of employees entering the scheme of circa £18,000.”

Employers should set a limit on the percentage of salary being used in a salary exchange scheme and ensure the remaining salary does not take an employee below the statutory minimum wage.

Take-up rate is key. “In companies where there is a high volume of eligible employees, the scheme discounts and savings can be substantial which triggers a higher take-up rate,” explains Creswick.

As the car scheme is part of an overall benefits programme, there is considerable flexibility in the make and model of car the staff member can choose. However, employees must still pay BiK tax, which means a vehicle’s CO2 emissions remain key.

The average CO2 for cars ordered in Zenith Provecta’s scheme is 115g/km, which compares favourably to the 158g/km for all new cars ordered in 2008.

“It tackles grey fleet issues by replacing older cars with newer, less polluting, better maintained models; meets duty of care concerns; introduces mandatory licence checking, as well as motor insurance at competitive rates; and provides a flexible benefit for staff,” says Hosking.

“It ticks all the boxes.”

"Employees need to have their eyes open"

Alastair Kendrick, company car tax expert at Mazars:

“This is not a straightforward arrangement and employers need to go in with their eyes open and engaging proper tax and employment law advice.

“Salary sacrifice is a change in the employee’s contract of employment and it is essential that the employer correctly varies the employee’s contract so that the salary sacrifice works or else PAYE and National Insurance will continue to arise on the pre-sacrificed salary.

“It is important to consider what is to happen to an employee’s pension and death in service and whether the employee can be protected from a reduction due to the sacrificed amount.

“For the employer, there is the concern of meeting their legal requirements in respect of maternity leave; long-term sickness; the cost of providing this benefit in periods when the employee cannot make a salary sacrifice; and the cost of early termination should the employee leave before the end of the lease period.

“In addition, employees need to be notified the impact of the taxable benefit changes on cars in April 2012, which will increase the tax cost for many employees. There is also a significant issue over VAT that if the cars are not available for business use then the 50% relief available for contract hire arrangements will not apply.

“It is also worth noting that the 50% block is the subject of review with the EU requiring the adjustment to be by reference to business use.

If this is introduced and the cars offered under salary sacrifice do limited business mileage then the relief available would be significantly reduced making the costs substantial.”

"Not a one-size-fits-all solution"

Dan Rees, company car tax expert at Deloitte:

“Salary sacrifice should not be considered as a ‘one-size-fits-all’ solution. It is very important that a feasibility analysis is conducted to ensure that the decision-makers in a business do not get their fingers burnt.

“While this is a great way for businesses to provide a new benefit to staff not currently eligible for either a company car or a cash allowance, it is critical that the numbers are calculated correctly, on a wholelife cost basis, taking account of the appropriate VAT and corporate tax recovery for the business, income tax, Class 1 and Class 1A National Insurance.

“We recommend a method of self-insuring for leaver’s costs, rather than early-termination insurance (ETI), by taking an extra amount of salary across the board to cover the costs in a contingency fund.

"This is because ETI is generally more expensive and does not remove the risk entirely.

“In addition, existing company car schemes run using wholelife costs would not necessarily result in savings being delivered by salary sacrifice.

To make a traditional company car scheme work via salary sacrifice, each employee entitled to a car would need to be given a notional cash allowance as a starting point, into which they would sacrifice for the car.

The cost to the business of the cash allowance should be the same as the provision of a benchmark company car. This is not really an improvement on a well-designed company car scheme.

“HMRC do not provide approval for scheme designs, but will comment on the implementation.

“We would always recommend businesses notify HMRC of their scheme.”

Case study: Freshfields

Freshfields employs 1,800 staff in the UK and has not had a formal company car scheme for many years.

But the firm hopes that around 100 employees will take advantage of Tusker’s SalarySacrifice4Cars (SS4C) scheme.

So far 10 orders have been placed in the first two weeks since the scheme was introduced and, according to Freshfields’ employee benefits manager Adam Brooke, staff reaction has been very enthusiastic.

“Prices typically range from £120 to £450 per month and there is a wide variety of models to choose from, including the latest Audi A3 and BMW models that emit less than 120g/km,” says Brooke.

“That has been important in meeting our environmental objectives.

“SS4C has opened up the possibility of having a company car to all levels of staff and there has been a very enthusiastic response so far.

"We expect the scheme to grow as word spreads, especially when staff realise that the monthly rental covers all insurance, breakdown, maintenance costs and even tyres.”

Benefits to employers and employees

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