This is a term that many SMEs know but that’s as far as it goes.
However, salary sacrifice could save both you as an employer and your staff that take up the scheme a chunk of money each year.
If you want to offer a valuable perk to your employees and encourage a cost effective and environmentally friendly company car policy, salary sacrifice could well be worth investigating.
How does salary sacrifice work?
In simple terms, when a salary sacrifice scheme is introduced, your employee gives up a portion of gross salary in return for a fully-maintained company car.
It’s particularly useful if you have staff who are not entitled to a company car but you want to offer them the benefit
It’s particularly useful if you have staff who are not entitled to a company car but you want to offer them the benefit as part of your staff retention scheme.
Your employee will no longer pay income tax or National Insurance on the portion of the salary sacrificed, but they will be liable to company car tax. So low CO2 emission cars work best in this regard.
What about you as the employer? Well, apart from providing improved benefits for working at SME business, you no longer have to pay the National Insurance on the amount of salary sacrificed, although there will be Class 1A National Insurance on the car benefit.
“Although large organisations were the first to take up the scheme, more and more small-to-medium sized businesses are realising the benefits that the scheme could bring for both themselves and their employees,” commented Andy Leech, managing director of Fleet Evolution, which specialises in offering salary sacrifice schemes to SMEs.
“Usually around 10% of employees enroll in the first year the scheme is introduced. We tend to find it’s younger staff who are keenest to sign up. Salary sacrifice offers more junior members the chance to run a reliable and economical new vehicle that otherwise may be out of reach for them.
“The main savings for most SMEs will be in terms of employer National Insurance, and the reduced payroll will naturally free-up cash-flow.
“As salary sacrifice works by encouraging low emission cars, this is also good for the company’s “green” ethic; in fact, we usually find that 35% of our customers report a reduction of CO2 emissions by up to 35%.”
It’s not all one way good news, of course. You will need to consider what happens to the car if the employee leaves – early termination fees can be expensive, although insurances are available to cover this possibility.
Implementing salary sacrifice
Salary sacrifice schemes, like any other, need to be properly implemented, and crucially they need to be fully explained to employees who are likely to benefit from them.
You also would be advised to check with your local Inland Revenue office to make sure that the scheme you want is fully tax compliant as you are altering your employee’s contract of employment.
However, some of these issues can be overcome. Andy Leech again:
“We have a simple plan when it comes to putting salary sacrifice into any of our client’s companies. We have a simple ‘rules’ session, we then set up a dedicated quotation engine and an employee pack. This is followed by session making sure the end users are happy with it and finally, our on-site launch which is where we have the opportunity to speak with employees personally and answer any questions that they may have.
“We don’t charge a fee for setting up the salary sacrifice scheme. The only thing we ask is that we have exclusivity when it comes to vehicle supply and a minimum supply – usually two cars per year.
“In terms of administration, we would expect that the client would need to put aside approximately one hour a week for the first 6 weeks.”
So is salary sacrifice right for your firm? SMEs traditionally don’t like anything too complicated when it comes to managing company cars. But there are plenty of advantages to running such a scheme that could make your business an excellent place to work.
And save you money at the same time.
Salary sacrifice key points
- Your employee choses a car, and you as an employer lease the car from a leasing company
- You then deduct the cost from the employee’s gross salary
- As an employer you get a reduced National Insurance bill although NI is payable on the car benefit
- Your employee saves NI and tax on the sacrificed salary – but is now liable for company car tax
- Salary sacrifice schemes need to be implemented correctly – best to get HMRC approval so you don’t land yourself in hot water over tax
- Watch for early termination charges if an employee leaves half way through the lease
- You will need to ensure the drivers are fully aware of company car policy and that you have a prescribed duty of care process for running company cars
- Salary sacrifice can help retain staff and make your SME business and attractive place to work