A SALARY sacrifice scheme takes advantage of the low rates of benefit-in-kind (BIK) on ‘greener’ cars – those with lower CO2 emissions – but it’s going to be all-change from April 2017 following the Chancellor’s 2016 Autumn Statement.
However the existing rules apply for the rest of the 2016-17 tax year and anyone taking a new salary sacrifice car in this period will have the arrangement protected until 2021.
But from 5 April 2017 new agreements for salary sacrifice can only gain tax benefits if the car has ultra low exhaust emissions – and that will only be re-defined on 5 December 2016 so bear that in mind if ordering a car that might not be registered until after 5 April 2017.
Essentially the employee sacrifices part of their gross salary for a company-provided car, with income tax and National Insurance based on the net income.
2016 Autumn Statement: Key points
- Tax savings on salary sacrifice and benefits in kind to be stopped from 5 April 2017, with exemptions for ultra-low emission cars (see below), pensions, childcare and cycling – but existing arrangements protected until 2021
- Currently up to 75g/km CO2, a new definition for ultra low emission vehicles to be announced on 5 December, 2016. The new company car tax bands just announced for 2020 define ULEV as up to 50g/km
- At present cars emitting less than 100g/km CO2 are subject to zero Vehicle Excise Duty (VED) but from 1 April 2017 all new cars emitting from just 1g/km will have to pay VED.
Salary sacrifice can be a powerful way to offer a new and significant employment benefit to non-car eligible staff or car eligible staff who elect to take cash instead of a traditional company car. It leverages the employer’s tax and commercial position to the benefit its employees.
The scheme has been benefiting 600,000 drivers but its death knell was sounded in Chancellor Philip Hammond’s 2016 Autumn Statement. The Treasury said: “This will mean that employees swapping salary for benefits will pay the same tax as the vast majority of individuals who buy them out of their post-tax income.”
It was softened with exemption for low emission vehicles – countered with the revelation that a new definition for ‘ultra low emissions vehicles’ (ULEV) won’t be announced until December 5, precisely four months before the new tax year when the salary sacrifice advantage axe falls.
However as a guide it was also announced in the Autumn Statement that the company car tax bandings for 2020/21 will define ULEVs as up to 50g/km.
Salary sacrifice schemes allow employees to give up part of their salary to gain a non-cash benefit – such as a lower emission and safer new car – which means overall pay is lower, so employees pay less tax and national insurance. Hammond called it “unfair”.
So how does salary sacrifice work, then?
Well, since BIK company car tax rates for environmentally-friendly cars are as little as 5% of their P11D value, it is often cheaper for an employee to take a car as a taxable benefit instead of buying or leasing one privately out of their after-tax salary.
You can think of salary sacrifice as a way to offer employees who want new cars the opportunity to swap some of their salary for a benefit in a way that actually reduces their tax bill.
Also, because corporate discounts are often available on these cars, it saves them money on the car too. There are also significant National Insurance savings for the employer.
Unlike Employee Car Ownership (ECO) schemes, there is no need to factor-in payments for business mileage when working out the potential advantages of salary sacrifice. All the cost savings come through the tax advantage of greener cars.
Offering salary sacrifice
In theory, your business could acquire cars itself and set up its own internal scheme. However, a ready-made scheme from a car leasing company not only takes away all the administrative hassle but the leasing company can also pass on the benefit of the volume-related price discounts it negotiates with car manufacturers.
The leasing company may also offer additional features such as online quoting and ordering as well as motor insurance and early termination insurance, which covers against any potential charges if an employee leaves in mid-contract.
What salary sacrifice can do for your business
- Deliver significant cost savings
- Enhance your business’s green credentials by encouraging drivers to choose the greenest cars
- Attract drivers currently taking a cash allowance back into a more safety-compliant method of company-provided car
- Provide all employees who aren’t eligible for a company car with the opportunity to acquire a new car at a lower price
- Enhance employee benefits without increasing budgets or overheads