Company cars were once the sole preserve of senior management and sales executives. The way in which they were funded made them a direct cost to the business. However, a growing number of organisations are using the salary sacrifice model (an established and well-received principle in, for example, the pensions market), to offer more inclusive car schemes that not only enhance recruitment and retention, but also lower cost and risk.

In a recent survey of its members, fleet decision-makers’ organisation ACFO found that more than a third of respondents offered a car salary sacrifice scheme. However, it also concluded that there remain significant concerns about the viability of such a benefit in some organisations.

Certainly, there are a number of factors to consider when designing and implementing a salary sacrifice for cars scheme. Moreover, there are some important ground rules that dictate whether this type of initiative is appropriate for different businesses.

Business benefits

The advantages of a salary sacrifice car scheme for businesses include NIC savings, cash savings, and the opportunity to offer an attractive employee benefit. Although the business still has to pay Class 1A NICs on the provision of the car, this can be substantially less than the employer NICs that would have been paid on salary sacrificed. Further cash savings are realised because the Inland Revenue advisory fuel rate (AFR) of between £0.10 and £0.25 is due on a company car, rather than £0.45 per mile under authorised mileage allowance payments (AMAP).

Moreover, by replacing ‘grey fleet’ – i.e. non-company controlled vehicles used for business purposes – with those acquired under a salary sacrifice arrangement, companies ensure drivers are behind the wheel of a brand new, low emission, regularly maintained and comprehensively business-insured vehicle. This not only reduces risk by addressing duty-of-care responsibilities, it enhances a firm’s green credentials, given that salary sacrifice is financially most attractive when buying a low emission car.

Offering a range of enticing tax-efficient benefits is becoming increasingly essential for organisations needing to attract and retain the best talent. This means it is the HR department that, in most cases, takes on responsibility for building a business case and promoting the benefits of a car salary sacrifice scheme. But HR will need to obtain buy-in from other key departments such as Finance and Procurement, as well as (most importantly) their staff to gauge initial appetite.

Mitigating risk

One of the most common barriers to introducing a salary sacrifice scheme for cars is lack of understanding about the costs and risks for the employer. However, there are ways to structure the scheme to de-risk it. A range of mandatory insurances can be built into the arrangement to cover areas such as redundancy, early termination, and death in service, as well as maternity, paternity, and critical illness. And the cost of this insurance can be built into the monthly amount of the salary sacrificed by the employee.

Alternatively, the employer can elect not to take any insurances and in effect, ‘self-insure’. This entails considering the size of the eligible employee base likely to opt for a car under salary sacrifice and adding a specific amount to the monthly payment to provide a contingency fund – what is in essence a ‘self-insurance pot’. Yet given that scheme take-up is an unknown quantity, the amount the employer should add into the salary sacrifice agreement to build a contingency fund would be extremely hard to judge, thus most schemes come with insurances built-in.

Certainly, the provider should offer both options. The more flexible providers will also review a company’s situation after a period of about 18 months to assess whether the existing insurance arrangements are suitable, as well as to evaluate all aspects of the agreement to ensure the greatest possible value is being delivered using best practice.

Five things to consider

A well-devised and carefully constructed scheme will bring substantial benefits to employer and employee alike. However, it is important to consider the following:

  • Salary sacrifice company car schemes may not be suitable for every employer. Businesses will need to investigate whether a salary sacrifice scheme is appropriate for their needs and not assume it can be a substitute for traditional car schemes.
  • An understanding about cost and implementation is necessary from the outset. Businesses should also be clear on objectives so that the scheme is designed accordingly.
  • Employers should get professional advice and use experienced providers, especially in relation to tax advice to ensure deductions from salary are dealt with properly.
  • There is a requirement for complete organisational engagement, including HR, finance and procurement. All areas will need to work together for the scheme to be implemented in a cost-effective and efficient manner.
  • Communicate, communicate, communicate. It is essential to explain clearly to employees how it works and what’s involved. Ultimately, building awareness and understanding will be critical to a scheme’s success.

 Article by Gordon Calder-Jones of Maxxia