Although the government announced in the 2016 autumn budget that it would be making changes to the salary sacrifice scheme, the final details were only confirmed in the 2017 Finance Bill on 20 March 2017.
Despite the lack of run-up, the new rules kicked in only a couple of weeks later, on 6 April, and were unaffected when a number of elements were dropped from the bill on 25 April, including 2020/21 tax bands, due to the sudden election.
This short notice has caused some confusion, and is expected to result in a fair amount of non-compliance in the first year as companies get to grips with the changes.
What are salary sacrifice and cash alternative?
Salary sacrificing is not unique to cars, and allows employees to allocate a proportion of their pay to a non-cash benefit. The allocation is done before tax is paid, which means that the employee officially has a lower income. This means they pay less tax and National Insurance.
It can be used to pay for items, such as bikes, childcare or gym membership.
Employers can also offer a company car or a cash alternative. The cash allows an employee to choose whether they run a car, and which car to go for, but they also have to cover the cost of VED, insurance and maintenance.
Employees choosing a company car instead of a cash allowance have historically been attracted by the low benefit-in-kind tax for those cars versus the cost of having to fund a car privately out of the post-tax cash allowance, but the new rules could see some change their mind.
The changes came into force on 6 April, so apply to any new salary sacrifice or cash alternative scheme taken out from now on. However, anyone already in a scheme will be exempt from the changes until 2021.
“Part of the confusion comes from the fact that there was a consultation started last summer titled ‘Salary Sacrifice,” explains Mike Moore, head of car consultancy at Deloitte. “But it also covers more than a standard salary sacrifice and covers any sort of cash alternative, where you normally have a choice from a restricted list in lieu of salary. Based on our statistics, about 40–50% of company cars are affected.”
Under the new rules, authorities now consider either the cash that an employee gives up, or the Benefit-in-Kind taxation that would be due on the car they chose.
“If the company car benefit came to £4500 for the year, and you gave up £5000 of salary you pay tax on the £5000,” says Moore.
Ultra Low Emission Vehicles that emit less than 75g/km are exempt from the new rules, and cars with high CO2 ratings will not suffer an increase in their tax liability because the BIK rate is higher than the tax due on the cash alternative.
For example, in the 2017/18 tax year, a higher rate tax employee that was entitled to a cash allowance of £5,500 chooses a £20,000 110g/km diesel car, giving a benefit value of £4800. The new taxable benefit value is £700 higher at £5,500 – a 14.5% increase.
As a result employer Class 1A NIC costs will increase by £97 for the year, and the driver’s tax costs will increase by £280 for the tax year.
However, the rise in BIK rates means the increase would only be 5.7% in the 2018/19 tax year and there would be no impact in the 2019/20 tax year, as the company car benefit value will be greater than the cash allowance value at this point.
“It depends on the policy decision,” says Moore. “It could be unfortunate that you have gone for a generous allowance and low-emission cars. It’s worth getting the two figures [the cash allowance and the P11D] together and comparing them carefully.
Those who opt for a more traditional sacrifice scheme, often through outsourced suppliers that provide everything in one package, are unlikely to be affected.
“We thought 25% would be impacted by £2.50 a month, but it has turned out to be less than that.”
Tusker is one specialist, and the firm’s chief marketing officer, Paul Gilshan, says that the changes have had far less of an impact than was predicted when they were announced in the 2016 Autumn Statement.
“The numbers that were affected when we looked at it in November were small, and now that the finance bill is in place, the impact is actually even less,” he says.
“Because cars are different propositions to other salary sacrifice products they get caught in the crossfire, but it is now clear that cars are significantly less affected than other products”
He points to the fact that the sheer convenience of the scheme, and the fleet-buying power of lease firms providing the schemes, will mean that the appeal will remain.
“When we look at driver surveys, the biggest attraction is the all-inclusive package – insurance, MoT, tyres etc, all through one monthly cost and with no deposit to pay,” says Gilshan. “That has always ranked higher than the savings you might get by shopping around for a retail deal.”
While there is an impact on 20% taxpayers and those opting for 75-100g/km cars, Gilshan says it is not as much as had been feared.
“When we looked at it, 50% weren’t affected at all, and 5% were taking ULEVs so they wouldn’t be affected either. We thought 25% would be impacted by £2.50 a month, but it has turned out to be less than that.” he says.
It is early into the changes, Gilshan says that Tusker’s feedback and experience so far suggests that there hasn’t been a big shift.
“Every scheme is different for every company, but we are not seeing the drop-off on orders and the quotes are comparable,” he says.
Mike Moore sees no reason to shy away from salary sacrifice based on what has been announced. “If you have a scheme in place and your provider is providing the right numbers I don’t see why you would move away from it. It [the changes] wouldn’t put me off and I don’t think it should.”