Salary sacrifice: the ‘must know’ facts for businesses and employees

For most within the corporate business world, salary sacrifice will be a familiar concept.

The contractual arrangements – which see employees agreeing to a reduction in their pay in return for alternative, non-cash benefits – have long been used by companies to realise tax and National Insurance Contributions (NICs) savings. In most cases, the benefit options have married with government efforts to support and influence our financial or lifestyle decisions.

The popularity of salary sacrifice has ebbed and flowed over the years, but with sustainability agendas now riding high, and national insurance contribution rises on the horizon, the tax break has honed back into sharp focus.

Fall and rise

Following the introduction of Optional Remuneration Arrangements (OpRA) in 2017, the popularity of salary sacrifice schemes waned.

Under OpRA, the tax savings that had previously been enjoyed on many benefits were effectively removed by government, with employees taxed on the greater of the value of the benefit or the salary given up.

While many employees faced an unwelcome hike in tax however, not all were affected with benefits such as cycle to work schemes, childcare vouchers and pension contributions excluded from the legislation. Significantly, with the green agenda gathering pace, ultra-low emission vehicles (ULEVs) of 75g of CO2/km or less were also included on HMRC’s exempt list.

More recently, the ULEV exemption has combined with a favourable benefit-in-kind (BIK) tax treatment for electric vehicles. This has reignited the fortunes of salary sacrifice schemes for the company car.

A spotlight on BIK

Against the backdrop of net zero emission commitments, the government cut the BIK tax rate on pure battery electric vehicles (BEVs) from 16% in 2019/20 to 0% in 2020/21, and then to just 1% for the current 2021/22 financial year.

For the 2022/23 financial year, beginning in April, the BIK rate will rise to 2% – and remain at this level to April 2024.

Drivers of plug-in hybrids (PHEVs) will also find BIK rates favourable. Here, vehicle rates are calculated using a combination of CO2 output and electric-only range and will consequently depend upon how far they can be driven with zero emissions.

What employers should know

• A rewarding proposition

Salary sacrifice schemes can form an integral part of a company’s rewards package, acting as a valuable recruitment and retention tool.

Employees benefit from a brand new, environmentally-friendly car at the fraction of the cost of a private lease. In addition to VAT and lease cost savings, they also save money on their income tax and National Insurance payments, with the car paid for before tax is taken.

In some cases, the schemes can effectively extend the provision of company cars to employees who may have previously been ineligible.

• Business savings

Under salary sacrifice, the reduction in employees’ salaries means that corporation tax and NICs made by the business also decrease. Up to 13.8% in NICs can be saved in total on the salary deductions.

Employers must still pay NICs on the employees’ leased vehicles, based on the BIK tax bands and their P11D values, but the low BIK rate on low carbon vehicles makes them a favourable option compared to their internal combustion equivalents.

A 1.25 percentage point increase in NICs is due to come into force from April as a result of the new Health and Social Care Levy, meaning employers will then pay an effective rate of 15.05%. This increase will serve to further reinforce the beneficial status of ULEVs, relative to fossil fuel vehicles.

What’s more, as schemes cost nothing to set up, for the employer they are effectively cost neutral. 

• An environmental, social and governance boost

ESG (environmental, social and governance) has become far more than a buzzword. Businesses’ efforts to help tackle climate change and social injustice have become vital to their relationships with customers and suppliers.

Indeed, a recent study found that 59% of companies have lost work as a result of their environmental, social governance (ESG) commitments[1].

By helping to make electric vehicles more affordable, salary sacrifice offers a compelling route for businesses to promote electric vehicles and reduce their carbon footprint.

• Reduce grey fleet risk

The HSE’s recently updated guidance on work-related road risk reinforces the message that employers have a clear legal responsibility for the health and safety of all employees that drive for work.

Companies, however, will often lack control over vehicles they do not lease or own.

Salary sacrifice schemes can help transfer grey fleet drivers into new, well maintained and comprehensively insured company cars, helping businesses better manage their duty of care responsibilities.

What employees should know

• Affordable green motoring

With remuneration shifting from cash to a non-cash benefit, income tax and NICs are reduced, and although BIK is still payable, as outlined above, this is significantly less for low or zero-emission electric vehicles.

What’s more, in addition to any VAT and lease cost savings, all service, maintenance, insurance, road tax and accident management costs will be covered through the company’s lease and fleet management arrangements.

• Pension payments may be affected

An employee’s pensionable salary will reduce as a consequence of their salary reduction, meaning their contributions, and contributions by the employer, may reduce accordingly. Financial advice should be sought by the employee in this area.

• Few restrictions

HMRC has not imposed any restrictions on the type of employees that can benefit from salary sacrifice, making affordability, insurance eligibility and legal entitlement the key considerations.

If authorised by the provider, employees can even have more than one car via a scheme – either for themselves or another family member – just as long as the salary sacrificed does not take them below National Living Wage.

For more information about how you and your employees can benefit from salary sacrifice, or for advice on setting up a scheme, please contact our team of experts. Email: advice@fleetoperations.co.uk