Company cars were once the sole preserve of senior management and sales executives. The way in which they were funded made them a direct cost to the business. However, a growing number of organisations are using the salary sacrifice model (an established and well-received principle in, for example, the pensions market), to offer more inclusive car schemes that not only enhance recruitment and retention, but also lower cost and risk.

Analysts at Deloitte estimate that currently there could already be up to 150,000 cars being provided through company car schemes. Yet there are a number of factors to consider when designing and implementing a salary sacrifice for cars scheme, and also some important ground rules that dictate whether this type of initiative is appropriate for different businesses.

Assessing the business case

For businesses, the benefits of a salary sacrifice car scheme include NIC savings, cash savings, and the opportunity to offer an attractive employee benefit. Although the business still has to pay Class 1A NICs on the provision of the car, this can be substantially less than the employer NICs that would have been paid on the salary sacrificed.

Further cash savings are realised in terms of reducing business-related mileage payments. If an employee is using their own car for business-related journeys, they would be eligible on the first 10,000 miles to receive authorised mileage allowance payments (AMAP) at £0.45 per mile. However, if they are in a company car, they are due Inland Revenue advisory fuel rate (AFR). This is calculated in line with the engine size and fuel derivative of the vehicle, but typically ranges from approximately £0.10 to £0.25.

One of the biggest draws for cars being provided under salary sacrifice is that it provides organisations with a means of meeting corporate social responsibility (CSR). It also enables organisations to meet their environmental footprint objectives by reducing their ‘grey fleet’ – i.e. non-company controlled vehicles used for business purposes. On average, these vehicles are older and create higher emissions than company or leased vehicles. In addition, companies must ensure duty of care for grey fleet drivers under British law. This means driver licence checks still need to be carried out and tyre and maintenance schedules observed.

By replacing grey-fleet cars with those acquired under a salary sacrifice arrangement, companies can ensure their drivers are behind the wheel of a brand new, low emission, regularly maintained and comprehensively business-insured vehicle. This not only reduces risk by addressing duty-of-care responsibilities, it also enhances a firm’s green credentials, given that salary sacrifice is financially most attractive when buying a low emission car.

Enhancing recruitment and retention

Most commonly, the business case will be a combination of duty-of-care issues, reducing the organisation’s carbon footprint, and reducing or eliminating grey fleet mileage. But offering a range of enticing tax-efficient benefits is becoming increasingly essential for organisations needing to attract and retain the best talent.

This means it is the HR department that, in most cases, takes on responsibility for building a business case and promoting the benefits of a car salary sacrifice scheme. But HR will need to obtain buy-in from other key departments such as Finance and Procurement, as well as (most importantly) their staff to gauge initial appetite.

Convincing senior management and other key stakeholders requires a compelling and fully-costed argument and it is vital to assess what the objectives of the company are when considering such a scheme. It is also important that a structured communications strategy is developed in order to maximise employee engagement and take-up.

Average adoption across the eligible employee base is tracking between 3% and 10%. This is why most schemes are only offered to companies with an eligible employee base of more than 500. Some providers will not consider an organisation that has less than 1,000. Designing and implementing a scheme is a significant undertaking and there is no guarantee of take-up given that it is a flexible benefits opportunity.

Mitigating risk

One of the most common barriers to introducing a salary sacrifice scheme for cars is lack of understanding about the costs and risks for the employer. This includes aspects such as maternity leave, long-term sick leave or redundancy, as well as complicated tax and legal issues that may arise. Most employers take the position that they would like to offer such a scheme, provided it can be implemented as a cost-neutral concern that avoids additional risk. 

Certainly, there are ways to structure the scheme to de-risk it for the employer. A range of mandatory insurances can be built into the arrangement to cover areas such as redundancy, early termination, and death in service, as well as maternity, paternity, and critical illness. The cost of this insurance can be built into the monthly amount of the salary sacrificed by the employee, thereby de-risking the arrangement for the employer.

Alternatively, the employer can elect not to take any insurances and in effect, ‘self-insure’. This entails considering the size of the eligible employee base likely to opt for a car under salary sacrifice and adding a specific amount to the monthly payment to provide a contingency fund – what is in essence a ‘self-insurance pot’. However, given that scheme take-up is an unknown quantity, the amount the employer should add into the salary sacrifice agreement to build a contingency fund would be extremely hard to judge, thus most schemes come with insurances built-in.

The experience of the scheme provider becomes critical here: they should be able to assess the needs of the company based on its sector and its eligible employee base, and design a scheme that best suits their requirement. This may or may not entail insurances, but certainly the provider should offer both options. The more flexible providers will also review a company’s situation after a period of about 18 months to assess whether the existing insurance arrangements are suitable, as well as to evaluate all aspects of the agreement to ensure the greatest possible value is being delivered using best practice.

Broadening the benefits package

In theory, any company can offer its employees salary sacrifice. However, schemes that provide staff with cars may not be suitable for every employer. For example, businesses within industry sectors that are traditionally associated with high levels of staff turnover or churn may find the cost of frequent early contract terminations prohibitive. Furthermore, the makeup of the employee population might not suit such a scheme – e.g. where there is a large percentage of part-time workers earning close to the minimum wage, or where there is little or no experience of flexible benefits.

No two salary sacrifice schemes are the same. Each employer will need help designing a policy to meet different requirements, such as the eligibility and demographic profile of their employee base. Their corporate objectives will also be different. Nevertheless, a well-devised and carefully constructed scheme will bring substantial benefits to employer and employee alike. However, it needs to be prepared using expert knowledge of salary packaging and payroll management if workplace benefits are to be maximised for both employers and employees.