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Benefit-in-Kind rates are exceptionally low on electric cars at the moment, so this could be the ideal opportunity to get your hand on one through a salary-sacrifice scheme

 

Salary sacrifice, as a concept, has been around for years and has been used by employers for all sorts of incentives such as childcare vouchers, bikes, pensions and, of course, cars.

With the introduction of electric vehicles and government incentives to promote them, EVs have found themselves in a sweet spot when it comes to tax breaks and salary sacrifice.

While salary-sacrifice schemes for cars are not a replacement for the company car and are an employee’s choice to take if offered as part of a benefits package, they are classed as a company car.

The idea behind offering a car via a salary-sacrifice scheme is that not only does the employee save money on PAYE and National Insurance taxation, because the car is paid for before tax is taken, but the company also saves money on its portion of National Insurance. This saving can, optionally, then also be fed back into the scheme to further reduce the cost of the car.

Normally a car wouldn’t make financial sense on a salary-sacrifice scheme because it would attract a level of company car taxation above any achievable saving. However, due to EVs and some PHEVs attracting very low Benefit-in-Kind taxation, it’s these cars that can offer serious savings. And these savings can be more than a third for a 20% tax band employee and nearing half for a 40% taxpayer. When you consider that a typical EV can have a monthly lease cost of around £600, saving £200 or £300 a month, suddenly makes EVs look very attractive.

While EVs are rocketing in popularity both overall and within fleet, because salary-sacrifice cars are lumped in with all other company cars for registration purposes it’s difficult to quantify this rise in popularity. SMMT data shows only the rise overall popularity of EVs within fleet [see table, right].

What data is available comes from those operating salary-sacrifice schemes.

Paul Gilshan - November 2021Paul Gilshan, CEO of market leader Tusker, explains: “Salary sacrifice is making electric vehicles affordable for the masses, particularly drivers who cannot afford to drive electric through other retail products. It is therefore a great contributor to the electric uptake.

“It shows in Tusker’s fleet – in 2019 just 13% of salary-sacrifice vehicles were electric, but just two years later, 73% of its vehicles are EVs.

“This is having a huge real-world effect on CO2 emissions for Tusker, with our average CO2 output currently at just 37g/km and we are now on track to becoming emissions-free by 2028, much earlier than our 2030 commitment.”

Richard Cox, Arval senior consultant in charge of salary-sacrifice schemes, points out why now is the best time for businesses to look at this benefit.

Richard Cox - November 2021“The government is committed to maintaining the low tax cost for EVs, at least until March 2025. Right now, that tax treatment means the salary-sacrifice scheme for electric vehicles specifically is very attractive,” he says.

“At the moment, we’re benefiting from the government trying to accelerate EV uptake before 2030, and they see fleet as the one area where they can provide the biggest incentive. Yes, they’ve got grants for retail buyers, but the real incentive is being channelled down to the corporate route, which I think they’ve identified as where the biggest opportunity lies.”

The rules for salary sacrifice set by the government mean that in theory anyone earning enough (salary sacrifice isn’t allowed to push anyone below minimum wage) can take advantage of them if they’re offered by their employer.

However, there are inevitably some businesses and employees that is suits more, and some it suits less.

Fleet Alliance chief operating officer Nigel McMinn says: “What we say to companies is, ‘if you’ve got extremely high staff turnover, and you’re just hoping that this is going to slow it down because it’s going to engage your employees and almost trap them, it’s probably not right for you’.

“It’s not going to wave the magic wand to slow your staff turnover down. If there’s, for example, a bullying culture, having salary sacrifice isn’t going to solve that.”

Companies may also have a naturally high staff turnover simply because of the sector they work in. Often, those employing younger people not only have higher turnover, but also lower wages and can incur higher insurance costs.Salary sacrifice: why now? - November 2021 - Image 1

One of the main concerns from businesses when considering salary-sacrifice schemes is what to do about employees leaving a company and triggering an early termination of a lease on a salary-sacrifice car.

Arval’s Cox believes putting simple criteria in place can help in this respect, such as having a minimum employment period and minimum age before a staff member can take up a car.

What is salary sacrifice

Salary sacrifice allows businesses to offer their workforce benefits which can be paid for by staff from their salary before tax is taken.

Paying for something before tax means the employee doesn’t pay their rate of PAYE tax on the item (saving either 20%, 40% or 45%) and the employer doesn’t pay National Insurance on the portion of the salary that’s deducted.

Under salary-sacrifice rules, cars are classed as company cars so attract Benefit-in-Kind taxation. This would typically off-set the initial saving. However, as the BiK rate for EVs is extremely low, these cars become financially attractive because not only can the employee save 20-45% of the sacrifice payment, but employers can supplement the payment with some or all of the NI saving – further increasing their attractiveness.

“Most employees have a notice period. However, if it’s going to cost the employee to get out of the contract, then there’s a consideration before leaving. The employer can then withhold that charge from a final salary or put it in a payment plan, or both. Most people don’t just run to the hills when they leave their employment.

“It’s important a company understands the risks involved in taking on additional leases for its employees, particularly in the case of early terminations.”

Cox added: “The savings that you can make through NI mean that risk-exposure pales into relative insignificance [once basic measures are in place]. There’s no real risk overall unless you have a massive redundancy programme.”

Tusker takes a different approach to this by including early termination insurance in its salary-sacrifice offer.

“With Tusker, unlike with more traditional leasing schemes, the supply of vehicles for employees is further supported by a comprehensive suite of protections which are offered as standard. Once a short exclusion period has passed, if an employee leaves the company, is made redundant, falls ill, or goes on maternity or paternity leave, the vehicle can be returned to Tusker with no early termination fee or penalty charge,” said Gilshan.

However, other leasing firms believe inclusive insurance for this can alter employee behaviour and push up costs.

“Early termination insurance is available but it is expensive because you’re potentially driving dysfunctional behaviour,” said Cox. “For example, if an employee is thinking of leaving in six months, they can take an expensive vehicle immediately and with no need to worry about any implications. So this drives up the cost. Companies and suppliers should look at alternative methods to mitigate and manage this risk exposure.”

Fleet Alliance- new boardAug21McMinn added: “If it’s a normal or even low staff turnover company, what we encourage them to do is make a provision in their own accounts and put a contingency fund in place. We can help them calculate what the likely early termination risk is, and then effectively they self-insure. We try and use it as a point of difference to say, compare and contrast what we have helped you calculate is the risk, and therefore the contingency need, compared to what others will say that you need to put away as an insurance premium.”

In reality, the two options will appeal to different employers, and the fact both exits will simply make salary sacrifice more appealing to a wider audience.

And for those thinking of offering salary sacrifice as part of their employee benefits package and also to improve their environmental, social, governance strategy McMinn points out that smaller businesses should also factor in the potential for increased fleet administration.

“If you’ve got a fleet of 50 company cars and add 70 salary-sacrifice cars, you’re then running a fleet of 120. So managing that can create a resource requirement and that’s something that’s often overlooked.”

Tristan Young