Company car tax and salary sacrifice: understanding the rules

The reduced company car tax on low-emission cars has suddenly made salary sacrifice attractive for both employers and employees.

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Company car schemes have recently become a hot topic among employee benefits professionals. The very low company car tax on low-emission cars has made car purchases funded through salary sacrifice much more appealing to employees than would be the case for conventional cars.

Here's how it works.

The employee funds the car, by taking a reduction in salary, and pays company car tax. Because the cost of the non-cash type benefit is deducted from the employee's gross salary, before statutory deductions, he or she is able to save income tax and National Insurance contributions.

It makes company cars available to staff who drive no or few business miles and would not normally qualify to receive them at low prices, as current tax rules encourage the uptake of cars with carbon emissions of less than 120g/km.

Salary sacrifice is being backed by all the main motor manufacturers in the form of competitive rates, as they see the value of reaching a new audience who would not normally be in the market for new cars.

“As more low emission cars enter showrooms and the Government’s continuing tightening of the tax regime favours such cars, our belief is that this decade could see resurgence in demand for company cars,” says Julie Jenner, who chairs the Association of Car Fleet Operators.

“Calculations show that employees’ tax bills on an upper medium company car could be around £120 a month if the ‘right’ car is selected – and significantly lower than that for smaller and cheaper models,” she adds. “Company cars deliver a complete hassle-free existence with all servicing, maintenance and repair costs included alongside insurance and other costs – perhaps only fuel used privately needs to paid for by the driver – as a benefit it remains tremendous value for money. No one can run a car privately at the same cost.”

Replacing ‘grey fleets’

Salary sacrifice also tackles corporate grey fleet issues by getting staff who would typically drive older, more polluting, less well maintained cars on occasional company business into brand new, more environmentally friendly vehicles.

More than 1,000 UK employees have taken advantage of the Zenith Provecta’s Salary Exchange scheme since its launch in 2008. They have each saved on average over £2,300 per contract, a saving of over 30% compared with sourcing the car themselves, according to Zenith.

In addition, CO2 emissions for the new cars ordered have been driven down to 115g/km. This compares with the SMMT's (Society of Motor Manufacturers and Traders) latest available figure of 158g/km for all new cars ordered during 2008.

Business accountancy firm Deloitte has seen 500 of its 5,000 staff join a salary sacrifice scheme that replaced a company car or cash scheme in February 2009.

“We have shortened the time which people have to keep cars to two years from four, the scheme funds itself and we’re seeing an average of 112mg/km emissions on the fleet,” says Mike Moore. “On top of that it makes our benefits package a cut above the competition when it comes to recruitment and retention.”

Positive employee reaction

London law firm Freshfields Bruckhaus Deringer has recently opted for Tusker’s SalarySacrifice4Cars (SS4C). Freshfields employs 1,800 staff in the UK and has not had a formal company car scheme for many years. But the firm now hopes that around 100 members of staff will take advantage of the salary sacrifice offering during its first 12 months, as part of a new range of flexible benefits.

According to Freshfields' employee benefits manager Adam Brooke, staff reaction has been very enthusiastic. Low-cost does not necessarily mean limited choice, and there are some surprising model choices which fall below the 120g/km limit, including new cars from Volkswagen, BMW and Audi.

"SS4C has opened up the possibility of having a company car to all levels of staff and there has been a very enthusiastic response from those who have taken this benefit so far. We expect the scheme to grow as word spreads, especially when staff realise that the monthly rental covers all insurance, breakdown, maintenance costs, even tyres." Brooke says.

“Employees are becoming more comfortable with the concept of salary sacrifice.  As an early adopter of ‘Green Cars’, we were the first law firm to implement it.”

“As a result of the scheme operating via salary sacrifice, employees are saving £1,020 on average per annum on the equivalent private rental for these cars. In addition, they benefit from the usual perks of having a company car: fully comprehensive insurance, maintenance, replacement tyres, servicing, annual road tax and European roadside assistance. All of which is included within the monthly cost.”

Freshfields saves approximately £300 per annum per car as a result of the net reduction in the employer's national insurance contributions. “A modest saving for the firm,” admits Brooke, “But this initiative is more about employee value and environmental savings than employer's savings so this is merely a helpful by-product.”

Considerations for employers 

LeasePlan officially announced SalaryPlan in March after its plans to enter the salary sacrifice arena were revealed late in 2009. Commercial director Matt Dyer says that the company’s three-year scheme could benefit between five and 10% of employees for its three-year deals, but he warns that that salary sacrifice could not provide a one-size-fits-all approach.

“Every organisation is different,” says Dyer, “With a different employee base, a different culture and different operational needs. Understanding if salary sacrifice will work for you, and how to best shape your scheme, can be a big but crucial first hurdle.

"In today’s highly competitive world the challenge to both attract and retain high quality people and talent is crucial. SalaryPlan has the potential to give employers the edge and we are experiencing interest from a wide range of companies and public sector organisations.”

Salary sacrifice schemes are quite easy to set up and operate, but in order that HMRC can allow the concession against income tax and NI, the scheme must be executed via a formal salary sacrifice arrangement. Your provider will manage and control the whole process, including payroll deductions, DVLA checking, accident management and insurance, and should also provide consultancy throughout the internal marketing and implementation processes.

Seven reasons why company car schemes may stall 

1. Bear in mind that there is no tax or NIC exemption as with childcare vouchers.
2. Inflexible: An employee can only opt in or out once a year, or with a change in circumstances.
3. There are risks for the employer if an employee takes extended maternity leave or becomes long-term sick. When on maternity leave, an employee receives maternity benefit, not salary,” warns Paul Jackson of the Miles Consultancy, “So there’s no salary to sacrifice: payments pass on to the employer.” Ensure that you can cover breaks in salary payments with insurance (a provider may offer this), or some kind of accounting provision.
4. Low staff turnover is essential. When a driver leaves, what happens to the car? It will be nigh on impossible to reallocate used vehicles on the scheme, so ensure that you choose a provider with a strong remarketing performance. Or build a persuasive argument for them to take the car on privately.
5. There are clear issues with pension contributions, Working Tax Credits and Child Tax Credits, especially as the sacrifice has to be made on a long-term basis
6. The 50% VAT payable on rentals may not be recoverable if there is no business use on the car.
7. Do you have sufficient workplace parking? A fleet policy that extends company car ownership to all employees will clearly have implications for the pressures on workplace parking. Providing a parking space is not a taxable benefit as yet, but it is on the cards. Providing vouchers or reimbursement of parking expenditure already is.

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