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  • Is a Salary Sacrifice Car Scheme worth considering as an employee benefit?

    A salary sacrifice car scheme can be a huge benefit to both the employer and the employee. It is seen an employee benefit, which in many cases helps to remunerate the employee for their full worth when sometimes an employer’s hands are tied and limited to a lower salary.

    It is when an employee gives up some of their pre-tax salary in exchange for savings on tax and national insurance. For the employee, the value of the car itself is only subject to Benefit In Kind (BIK) tax, which is dependent on the list price of the car and CO2 emissions.

    Before implementing a salary sacrifice car scheme it is important for both the employer and the employee to be aware of the benefits to them and to build up a view of how the scheme will affect them. As an employer you should ensure that the employee is informed on all sides of the argument for a salary sacrifice car scheme, including how receiving a company car could negatively affect them so they can weigh up the pros and cons.

    Salary Sacrifice car scheme

    How a salary sacrifice car scheme affects the employer

    Generally, a salary sacrifice car scheme is low cost or can even be cost-free for an employer to introduce. Schemes can be fully managed by the provider of the salary sacrifice cars and most of these will manage maintenance, servicing, fleet insurance, and even communications concerning driver safety how to keep your fleet car insurance premiums down.

    Salary sacrifice car schemes can also help organisations to meet their carbon-friendly agenda, whilst cutting overall business costs. Not only does a salary sacrifice car scheme provide tax savings to the employee, but the employer will also make savings in NI contributions and corporation tax.

    Salary sacrifice car schemes can be a way of the employer ensuring a term of service. Employees are generally required to pay an early termination fee if they decide to leave the business before the end of this term and therefore most do decide to stay it out with the company they are working for.

    In addition to the main savings to be made from tax, employers can also often benefit from reduced mileage payments as the employee is not using their own car for business travel. In the case of a salary sacrifice car scheme, employees cannot claim from the approved mileage allowance payment, which considers wear and tear of the vehicle, but will instead be reimbursed at the advisory fuel rate.

    When implementing a salary sacrifice car scheme the employers are advised to produce detailed documentation of terms and should also consider adding terms for protection against redundancy, resignation and maternity leave to protect themselves. The employer must also ensure they gain approval of the scheme from HM Revenue and Customs.

    How a salary sacrifice car scheme affects the employee

    A car provided to the employee under a salary sacrifice car scheme provides a fantastic option with not only enticing tax benefits but also hassle-free benefits where the car, full maintenance, fleet insurance and road tax are all covered. Tax breaks are of course even more attractive to those on higher income tax rates. Not to mention that the vehicles themselves are also cost effective where fleet discounts and bonuses are passed on and preferential rates are applied, so the employee will often get a more sought after vehicle for their money. The larger the organisation the greater the buying power and discounts achieved.

    Where salary sacrifice car schemes include maintenance, insurance and road tax it means that the employee only has one single monthly outgoing for benefit in kind tax with regards to their car which is relatively low, predictable and does not vary. This of course is very unlike the actual nature of owning a car. In addition to this at the end of the term of the lease the car is easily returned and replaced (subject to standards).

    Salary sacrifice car schemes can, however, affect an employee’s tax credits and state pension. Whilst any claims for tax credits may increase, depending upon the pension scheme, the gross salary is reduced and so therefore are the contributions to their pension will also be decreased. It is important then for the employee to know what type of pension they have.

    There will of course be the risk of early terminations fees for an employee and schemes usually run for 2-3 years. If an employee was to leave the business then they will either need to pay this fee or perhaps decide to buy the car outright, which many often do at a good rate.

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