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Mike Belcher

Hitachi Capital Vehicle Solutions

Head of Sales

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How to limit the financial risk of salary sacrifice schemes

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As salary sacrifice schemes provide the opportunity to offer cost-neutral employee benefits, it’s no surprise that they are becoming an increasingly popular option for many businesses, especially as a way of funding high-value benefits such as company cars.

As appealing as such schemes may seem, however, without a carefully thought through approach to management and reporting, they can easily turn into a costly mistake.
 
Once an employee benefit has been given, it generally can’t be taken away again, even if circumstances change, potentially leaving employers out of pocket as they continue to foot the bill.
 
This means that it is absolutely vital to plan ahead and map things out well in advance, which includes putting contingency plans in place in order to counter any possible changes for individual employees and the business as a whole.
 
Salary sacrifice schemes for company cars are often monitored and reported on in the same manner as standard company car fleets. But such an approach commonly overlooks the need for forecasting and forward-thinking analysis.
 
Salary sacrifice is still a relatively new method of fleet funding, which means that there are few schemes that have been around long enough to demonstrate the long-term cost impact. But long-term staff absences such as maternity or sick leave are one of the most common situations for unprepared employers to sleepwalk into.
 
In the case of maternity leave, in particular, while the employee’s wages will gradually be phased down to zero, the monthly salary sacrifice contribution towards their car cannot be altered, nor the car itself taken away.
 

Countering risk

 
So if a worker was formerly giving up say, £200 of their monthly take-home pay for a car, their employer would find themselves footing the bill during the period of maternity leave.
 
Another risk that must be taken into account is the possibility of an employee returning a damaged car when they leave the company.
 
As a result, when returning a vehicle to the leasing provider, it is usual for the company to have a policy in place in order to ensure that the staff member concerned settles any charges for damages that were incurred over the period of the lease.
 
If they have already left the company, however, this employer will be left to pick up the costs associated with the damage. The same goes for employees that generate excessive mileage costs on returning the vehicle. It could be written into the policy that the employee is responsible for these costs, however.
 
But if such costs are consistently high, it may be worth reviewing the mileage across the whole fleet. If the mileage has been underestimated, the amount sacrificed by the employee cannot be altered. Therefore, this kind of scheme is best suited for low-mileage drivers.
 
The first step in countering such risks is to create a model that includes all of the variables in order to predict the risk of maternity leave, vehicle damage and so on – very much like an insurance firm might. From this model, you will be able to factor in a financial contingency on a per vehicle, per month basis.
 
Some employers actually go on to take out insurance on the value of these risks, but this approach can be quite expensive.
 
The second thing to consider is market intelligence reporting. It is important to have a handle on the business’ future income through the salary sacrifice scheme, which should be compared against any liabilities highlighted.
 

Balancing responsibilities

 
Employers must also ensure that their scheme is financially secure, something that is particularly relevant when factoring in the size of any contingency fund.
 
These types of schemes are driven predominantly by price. Therefore, any amount that is factored in to offset risk can have a detrimental impact on the scheme’s success. This is a critical balance to strike.
 
While effective financial management is vital, there is also a balance to be struck in terms of responsibility between the HR and finance departments as salary sacrifice cannot properly be dealt with either by one or the other in isolation.
 
All employees signing up to the scheme must be involved in a conversation with their fleet supplier and fully recognise their own roles and responsibilities. While there are a lot of financial factors at play, it really boils down to staff members having a firm understanding of the impact of the situation on their take-home pay.
 
Workers making use of salary sacrifice schemes will also need to make arrangements regarding their taxes as those who are ill-informed fail to do so could be in for an unpleasant surprise after being on the wrong tax code for months .
 
Leasing companies can advise employees on exact changes to their take-home pay and the process that they will need to follow, however.
 
But what it all boils down to is that, if you take the time to conduct an in-depth analysis of the ramifications of salary sacrifice schemes, they can prove to offer an effective cost-neutral benefit for employers and employees alike – and you should be able to avoid any nasty surprises.
 
 
Mike Belcher is head of sales at vehicle finance and management services provider, Hitachi Capital Vehicle Solutions.

This article was first published by our sister website, www.accountingweb.co.uk.

One Response

  1. A company definitely needs to
    A company definitely needs to consider carefully when they look into giving big employee benefits such as cars. But there are lot of financing tools that can help both the employer and the employee to get things sorted out without too much repercussions. At the end of the day, a novated lease could really benefit both parties if done just right!

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Mike Belcher

Head of Sales

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