What are the benefits of offering cars as a salary sacrifice benefit?
Car salary sacrifice can be used to offer cars as an optional benefit or even as the basis of a complete company car scheme solution. It replaces one form of tax with another, shifting part of the employee’s remuneration out of their salary taxed at 20% or 40%, plus National Insurance, into a benefit car where the starting rate of BIK tax on very-low-emission models in 2015/16 is just 5%.
The employee pays less tax and national insurance on the benefit than they would if they took the equivalent salary and used it to fund a car privately. The reduced level of tax paid by the employee means there is a lower Class1A National Insurance (NI) bill for the employer too.
Another great advantage of salary sacrifice is that it needn’t cost anything to get off the ground. Alphabet do not charge for setting up our schemes, so the only up-front cost to the employer is normally the time of the internal departments involved.
Having said this, it is a good idea to set aside a budget for communications as this will enable you to launch the scheme with a real splash.
Salary sacrifice for cars is still a relatively new concept and some employees will assume that there’s a hidden agenda somewhere. Those suspicions will to go away quickly as long as companies communicate openly and engage with their employees’ questions.
Alphabet’s position is to support the communication campaign strongly, both in terms of content with materials and in person; however, we try not to be the main channel. The persuasive dialogue is between the fleet and HR teams and the employees.
When we launch a salary sacrifice scheme, we typically hold road show events at the customer’s offices, sitting alongside their fleet and HR teams to explain the scheme and answer questions face to face.
MANAGING LEAVERS AND MATERNITY
Because each car contract is with your business, not with the employee, it is important to decide at the outset how to handle any costs arising from early termination, excess mileage, maternity breaks, and so on. Some employers include the cost of appropriate insurances in their employees’ repayments. Others ‘pool’ some of the NI they save. Either way, car salary sacrifice is highly cost-effective.
Also, because a salary sacrifice scheme is quite likely to involve more than one level of user (car-eligible and non-car-eligible, for example); the supplier’s scheme software also needs to be able to handle these different levels. Getting that right is critical, both from the perspective of giving the driver a seamless experience and in terms of taking away potential administrative hassle from the fleet or HR team.
Alphabet has built a specific tool into our online quoting and ordering system to help employees make that kind of comparison. Employees don’t need to understand all the ins and outs of company car BIK to use it – they can go into our system and check out the net cost of salary sacrifice vs. a PCP deal they’ve been offered on any model. Both our quoting system and the comparison tool are designed to integrate into our customers’ online flexible benefit menus. This reinforces the concept of cars as a benefit option for everyone, like childcare vouchers, smart pensions or bicycles.
Salary sacrifice benefits for the employee:
- Pay less Tax and National Insurance
- No credit check and no deposit
- Improved personal cash flow
- Hassle-free ‘ownership’
- Status of running a new car
- Lower fuel bills from the latest, more fuel efficient cars
- Salary sacrifice benefits for the employer:
- Improved corporate tax efficiency of using contract hire
- Lowe Class 1A National Insurance
- Cars count toward your fleet discount
- Strengthens your green credentials
- Reduces corporate manslaughter risk and aids grey fleet management
The advantage of salary sacrifice is that it naturally incentivises employees to choose greener vehicles. That’s because BIK tax is lower on low-CO2 cars: the ‘green cost benefits’ show up clearly in the form of lower monthly payments when employees compare different models.
Even so, it is very important to help employees to appreciate the close connection between CO2, tax and the cost of fuel. For employees with children, it is also important to get across the message that there are plenty of family-sized cars at the low end of the CO2 spectrum.
Salary Sacrifice allows employees to acquire cars in a way that is environmentally responsible as well as financially beneficial. It puts your company and your people in a win-win situation by virtue of their employment, which is the definition of a successful benefit.