Fleet Vision International

Net zero sustainability demands and an ever-increasing shortage of talent are both putting pressure on UK businesses.

Salary sacrifice car schemes are an increasingly popular way to tackle both issues.  With scheme uptake on the rise, Dan Wright, Product Manager for Salary Sacrifice from VWFS Fleet answers the questions fleet managers may have.   

What is salary sacrifice and how does it work?

Salary sacrifice schemes are where an employee gives up an amount from their gross (pre-tax) salary in exchange for a non-cash benefit, such as childcare vouchers, pensions or a car. The employee pays no tax or national insurance contributions on the amount being sacrificed and the business also makes savings on this reduction in salary. Businesses also benefit from Class 1A National Insurance contribution (NIC) savings.

A salary sacrifice car scheme enables a vehicle’s monthly lease payments to be ‘sacrificed’ from an employee’s gross salary each month. This means employees who do not qualify for a company car, or who have opted for a cash allowance, can access a brand-new vehicle at an affordable price– with no upfront payment, no credit check (and no impact on credit rating) and no hidden costs.

All the car’s extra running costs – including insurance, servicing, maintenance, and breakdown cover – are included in the vehicle’s monthly cost through the salary sacrifice scheme. This means employees do not need to worry about any unexpected costs to keep the car on the road.  Salary sacrifice car schemes are particularly popular for electric vehicles (EVs) and some plug-in hybrid electric vehicles (PHEVs), because the low Benefit-in-Kind (BIK) rate makes it a cost-effective way of driving a brand-new EV or PHEV. EVs benefit from just a 2% BIK rate (fixed until 2025 and rising one per cent a year up to to 5% by 2027/28 tax year), whereas a petrol equivalent might have a BIK rate of 37%. PHEVs with low CO₂ emissions and a good electric-only range can also benefit from single-digit BIK. 

How many businesses offer salary sacrifice schemes, and how has this changed in recent years?

It’s clear that increasing numbers of businesses are looking at salary sacrifice car schemes as a way to address their scope 3 (indirect emissions) levels from employee grey fleets, with the added benefits of tax savings and staff retention. According to the Fleet 200 Strategy Network survey, over a third (33%) of companies have introduced a salary sacrifice car scheme as an employee incentive and numbers are on the rise. Indeed, salary sacrifice schemes were up 68% year-on-year according to figures published by the BVRLA Leasing Outlook report as the understanding of such schemes becomes more widespread and businesses and employees see tangible results.

Why are salary sacrifice schemes proving so popular with businesses?

A flexible salary sacrifice car scheme can be an important part of a remuneration package to attract and retain talent within the workforce. It’s a cost-effective way to offer an employee benefit while providing savings and benefits for both the employer and employee.

And it also helps with sustainability ambitions. Salary sacrifice car schemes help incentivise EV adoption with employees and therefore reduce their indirect scope 3 emissions.

How do salary sacrifice schemes support talent attraction and retention?

The competition to attract and keep valued employees is fierce, with many prospective workers looking at a range of factors before opting for a role.  Incentives such as a salary sacrifice car scheme can help in this regard.  Schemes also offer many financial benefits that are extremely attractive to new candidates as well as helping to retain experienced staff the company does not want to lose.  Aside from the tax liability reduction, salary sacrifice opens the opportunity to drive a new electric vehicle which otherwise could be beyond the financial means of the employee.  With no upfront deposit, no credit check and predictable costs with maintenance and servicing included in the monthly costs, the driver simply has to charge to get on the road. Insurance costs are also fixed for the contract term – a level of certainty that isn’t available to most car buyers. Drivers can also enjoy the certainty that low BIK rates for EVs have been confirmed by the Treasury until the end of 2027/2028 so staff will know their tax liabilities for the coming years.

How do salary sacrifice schemes help to improve business sustainability?

Businesses are having to look at how to reduce all aspects of their emissions to pave the way to a net-zero future.

Salary sacrifice car schemes are an affordable way to drive a new EV. They’re driving forward the adoption of EVs for employees. Increasing the number of EVs commuting to the workplace can reduce tailpipe emissions. This means businesses can reduce their scope 3 or indirect emissions. Alongside the financial advantages for employees, improved sustainability comes with its own talent attraction. IBM research found that 67% of people would accept jobs from organisations they consider to be environmentally sustainable

How do salary sacrifice schemes reduce business tax liability?

It’s not just employees who financially benefit from salary sacrifice car schemes. Offering electric vehicles through a salary sacrifice scheme, can, for example, provide substantial Class 1A NIC reductions for companies. Businesses can typically save around £80 to £100 per employee per month for each zero-emission vehicle on the scheme.

At a time when organisations need to offer competitive benefits to stand out in the recruitment market while potentially battling rising costs themselves, a salary sacrifice scheme is a cost-free way to remain competitive in a tight talent market.

What are the costs associated with offering salary sacrifice schemes for employers?

Salary sacrifice car schemes can be offered at minimal cost to the employer. The monthly cost of the vehicle is covered by the employee – taken from their gross salary each month. This includes maintenance, servicing, insurance, and breakdown cover. 

What happens if an employee leaves the company during the scheme?

Salary sacrifice car schemes offer in-built protection for companies so they are covered in the event of employee lifestyle decisions or changing circumstances. For example, VWFS’s salary sacrifice scheme protects against a range of occurrences including resignation, redundancy, retirement, maternity, paternity, long-term sickness, death in service and other physical or mental health-related issues.

Are there any considerations to think about when implementing salary sacrifice?

A salary sacrifice car scheme can be opened to all employees or restricted to a particular cohort depending on the business objectives.  The important thing to consider is employees can’t go below minimum wage when sacrificing their salary, which can limit who’s eligible for the scheme.

It’s also important to engage with staff to make them aware of the scheme and encourage uptake for maximum impact.

How can businesses go about introducing salary sacrifice schemes for their employees?

Businesses looking to introduce a salary sacrifice car scheme need to carefully consider its merits and be clear on the strategic objectives behind making the scheme available. This is everything from the means to attract and retain staff to addressing the long-term sustainability implications of the company’s grey fleet. It can encourage easy and cost-effective access to EVs for employees who otherwise could not afford an EV switch while providing reduced business tax liabilities: it’s a win-win.

Or it can be a combination of all of the above.

Schemes can be constructed to suit the particular necessities of the business considering the varied requirements and existing options already in place within the company covering fleets, company cars and personal driver use. Once the decision has been taken to proceed, it’s important to build a clear communications plan that explains the salary sacrifice options before employees, outlining the benefits and the responsibilities involved to help incentivise interest and uptake.  Finally, partner with the right

supplier to provide the scheme; one that can provide a bespoke solution and is able to clearly demonstrate the success of other schemes they have instigated across the business community.

For details of salary sacrifice car schemes available through VWFS Fleet, simply visit https://www.vwfsfleet.co.uk/business-leasing/fleet-funding/salary-sacrifice.