What is Salary Sacrifice?

A salary sacrifice scheme allows employees to give up the right to part of their salary due under their terms & conditions of employment in return for an employer’s agreement to provide the employee with a non-cash type benefit. The salary is sacrificed before tax and National Insurance (NI) is calculated effectively resulting in a discount on the product or benefit.

Previously these benefits have typically been those that attract some additional tax advantages for the employee and/or employer (e.g. Childcare) but just about any benefit can be offered as part of a salary sacrifice scheme.

Employers can significantly enhance the value of their employee reward package, by offering staff a range or environmentally friendly company cars, without increasing payroll costs. Many employers are therefore considering the inclusion of company cars within their existing flexible benefits schemes, with the cost of the car being met via salary sacrifice.

Salary sacrifice is financially most attractive on sub 120 g/km cars – BIK savings for employees and NI and corporate tax/capital allowance savings for employers. It is largely targeted at perk rather than business-need drivers.

How Salary Sacrifice works 

• The employer offers employees the option of a company car.
•  Interested employees select a vehicle; decide how many miles they will complete per annum, and how long they would like to keep the car.
• The employer acquires the car via a contract hire agreement.
• The employee agrees to a salary sacrifice to fund the contract hire cost, which will include maintenance, breakdown cover and road fund licence.

 The Benefits of Salary Sacrifice to employers 

Employers may choose to benefit from the associated reduction in NI costs but schemes are usually designed to be cost neutral, albeit with a buffer built in to cater for early leavers or other unforeseeable events.
Although employers may not generate a direct financial saving, they benefit by being able to offer a fantastically attractive proposition to employees that adds real value to their remuneration package at no extra cost. Therefore:

•  As employees seek out employers that offer a reward package that fits with their lifestyle, a well run car scheme can promote the company to ‘employer of choice’ status and enhancing employee recruitment, motivation and retention.
• Salary Sacrifice for cars can help employers to maximise the ‘total reward value’ of their benefit package and thereby increase employee motivation and enhance staff retention rates.
• As salary sacrifice works best for low emissions cars salary sacrifice should also enhance the employer’s ‘green’ credentials.
• As participation grows, Providing employees with a vehicle under a salary sacrifice scheme considerably reduces the Duty of Care risk and the environmental impact of business travel, when compared to employees using their own vehicles on company business, can also be substantially reduced.

 The Benefits of Salary Sacrifice to employees

• The salary sacrifice allows the employee to surrender part of their salary in return for the employer’s agreement to provide a non-cash benefit. The employee is therefore able to pay for most motoring costs-effectively everything except fuel –from gross income, not net.
•  Because the cost of the car is deducted from the employee’s gross salary, before statutory deductions, he or she is able to save income tax and National Insurance Contributions. For example, a basic rate tax payer could give up salary taxed at 31% (income tax and National Insurance Contributions) and instead choose a petrol car with emissions below 120g/km and pay income tax on only 10% of the list price.
• Employees may also benefit from volume-related and bulk fleet discounts and receive the usual benefits associated with driving a company car.