Salary sacrifice: universal fleet solution or niche product?
Salary sacrifice has been a buzzword in the fleet industry for the last few years, as leasing and fleet management firms highlight how such schemes can be used as an effective means of providing employees with the benefit of a company car whilst proving cost-effective for the company.
But whilst the term “salary sacrifice” is well known in itself, with a growing number of fleets looking to use such schemes as a way to attract new recruits and reward loyal staff, there still seems to be some confusion in the industry about what type of firms can benefit the most from salary sacrifice and how best to implement it.
The principle behind salary sacrifice is, in itself, quite simple and has already been applied to pensions, childcare vouchers and “bike to work” schemes. It enables an employee to sacrifice part of their gross salary in return for the provision of a non cash-type benefit. The benefit for the employee comes through saving income tax and NIC while the employer also gains from reduced NIC contributions.
However, when salary sacrifice schemes are used as a means of providing a company car, the employee is still required to pay Benefit-in-Kind taxation. As a result of this, for the scheme to operate effectively for them, the employee’s tax and NI savings must exceed the cost of the BiK that they’re paying. Therefore such schemes work best when combined with vehicles with a minimal BiK to maximise the savings.
Not only can such schemes benefit drivers through cost savings – both compared to running a conventionally funded company car or even for employees who would normally purchase a vehicle themselves – but, as with conventional company cars, they also take the hassle out of everyday motoring. Many schemes provide cars that are fully maintained and insured, and also covered for servicing and maintenance, road tax, tyres, windscreens and even breakdown recovery.
And it’s not only the employee who benefits; the HR department can gain from the attractiveness of such schemes for both current and prospective staff, as Andrew Kirby, commercial director – employee benefit schemes for Zenith, explains: ‘There are a wide range of benefits including the ability to retain, recruit and motivate employees at no cost to the business. The employee usually chooses to drive the car for a two or three-year period and therefore it can be a good retention tool as well as a fantastic addition to an existing benefits package.’
And the employer can also gain by offering a benefit to staff at no cost to themselves or even – if structured right – with a saving in the form of a reduction in employer’s National Insurance. Although under salary sacrifice schemes, the employer still needs to pay NI on the car benefit, they don’t need to pay NI on the salary that is sacrificed. If the scheme is structured correctly, this generates a saving if the NI paid on the company car is less than the NI that would have been paid on the salary.
Zenith’s Andrew Kirby continues: ‘Both employer and employee can benefit financially from a salary sacrifice scheme. The employee exchanges their salary for the ability to drive the car and therefore they pay less income tax and National Insurance. They also benefit from enhanced corporate discounts. This means the costs incurred can be significantly less than retail market alternatives. They also get the advantage of fixed deductions and protection from inflation, such as in insurance and maintenance.
‘The employer can deliver the scheme at no cost to themselves and also save on employer NIC contributions. Schemes can be structured to be cash generative for the employer.’
And there are operational benefits too. ‘The company gets to provide an exciting new employee benefit with very little ongoing management or admin, as all this should be taken care of by the provider,’ says Kirby.
Meanwhile the employer can also benefit from improved road risk management when salary sacrifice is used as an alternative to “grey fleet” vehicles; by replacing employees’ own, typically older cars with brand-new, better-maintained models and using other measures such as licence checking, fleets can help ensure that they are complying with their duty of care responsibilities. And even the risks from early termination can be covered by the provider.
Zenith’s Andrew Kirby says: ‘As drivers are travelling in new, properly maintained and potentially safer cars the employer benefits from improved duty of care compliance. In terms of risks from early termination, all risks can be covered through contingency funds, early termination insurance or through reallocation of the car.’
And with such schemes favouring low-emission cars – which generate the biggest tax savings for staff – employers can also use such schemes to help reduce their corporate carbon footprint.
A fitting solution?
So who are such schemes suitable for? Across the spectrum of firms offering salary sacrifice for cars there is a unanimous view that the mechanism is beneficial to many types of fleets, although they need to be carefully implemented.
According to Andrew Kirby of Zenith: ‘Salary sacrifice is suitable for a wide range of companies within both the public and private sector. The schemes are designed to be at no cost to a company. Although implementations should be handled by your provider through a dedicated team, there will still need to be some input from key areas within a company such as HR, legal and payroll.’
Meanwhile, LeasePlan, which runs its SalaryPlan scheme, also agrees that such schemes hold interest for many different types of fleets.
The firm says it has been concentrating on the opportunities offered by salary sacrifice schemes since October 2010, but has noticed a significant increase in activity over the past 18 months.
‘There has been an increase of over a third in our customer base in the past 12 months and a sizeable rise in activity with tenders being presented to us,’ says Sharon Richardson, the project manager for the company’s SalaryPlan.
She stresses that LeasePlan’s growing success in the field rests upon their early planning. ‘We’ve been developing our own salary sacrifice solution entirely, rather than simply picking up a “white label” option.
‘In terms of where this activity is happening, we’re seeing increases across all sectors; both private companies and public sector clients. As we’re more than a leasing company, we are able to offer a solution for a whole range of risk management and support issues in addition to providing the vehicle. It’s this ability to tailor which seems to make SalaryPlan appealing across a range of markets.’
However, when it comes to the size of the fleets that can implement such schemes, this depends on the provider, with some salary sacrifice specialists saying that their schemes are aimed at larger fleets, whilst there are others who work with firms with as little as 20 employees.
Zenith’s Andrew Kirby says: ‘We have found that the schemes are able to reach their full potential where there are 1,000 or more employees within the organisation as they can be tailored to the company’s specific needs. Smaller companies may choose a more “off-the-shelf” product.’
He adds: ‘In terms of salary sacrifice drivers, there is no “typical driver” and they include a wide range of ages and income brackets. We find that those attracted to the scheme tend to either like the significant cost savings that can be achieved, the fixed easy to budget for costs, or are driven by the all-inclusive package, the dedicated service and hassle-free nature of the product.’
Meanwhile, LeasePlan says it’s the tailored approach of its product that attracts fleets.
The firm says that as its complete service offering was created by developing its own approach from the ground up, LeasePlan is confident it will continue to produce a range of enhancements to the core product of supplying a vehicle as well as being able to react quickly to changing market conditions.
Even more importantly, the flexibility in design means the scheme really can be built around the needs and objectives of a specific customer. One example area of this customisation is in the communication of the scheme, both during the promotion stage and in-life.
LeasePlan’s Sharon Richardson points out: ‘Understandably, we find that already busy fleet managers don’t necessarily want to have to deal with a whole new range of responsibilities such as the communication.’
Given that the success of any Salary Sacrifice scheme rests in employee adoption, LeasePlan says it believes strongly in the dedication of a committed resource for the communication of the scheme to this audience.
LeasePlan’s Richardson continues: ‘Any scheme we can offer is only going to be as successful as it ought to be if our customers’ employees think it’s worthwhile to take it up. Many of those signing up to a scheme haven’t had a company car before so are unfamiliar with that kind of benefit.’
For that reason, LeasePlan offers expert consultancy advice and bespoke planning which enables them to create tailored communication plans designed to underpin the entire scheme.
Ultimately, it is such expert consultancy and tailoring along with strong communication from the employer’s own end that will ensure the success of salary sacrifice schemes – but with a raft of benefits on offer to the right fleets, it could be well worth exploring.
Case study - WSP sees salary sacrifice benefits
Dubbed WSP Advantage, a salary scheme introduced by Venson Automotive Solutions for Manchester-based WSP Group is meeting the firm’s economic and sustainability objectives.
WSP Group is a global design engineering and management consultancy specialising in property, transport and infrastructure, industry and environment projects.
Established in the UK in the 1970s and listed on the London Stock Exchange since 1987, WSP started its business partnership with Venson in March 2006 with the introduction of a dual-supply contract hire arrangement for its then fleet of 650 company cars.
The WSP Advantage scheme was launched in July 2010 and sees WSP employees opt into the scheme after giving up either their current company car or cash in lieu of a car.
Typically, employers introduce a salary sacrifice scheme as one of an increasingly long menu of staff benefits – and it is in addition to a traditional company car option.
However, WSP decided the “win wins” delivered to both itself and employees from the initiative would mean the end of its own traditionally run company car fleet.
Key reasons behind WSP launching its salary sacrifice scheme were to drive down the carbon footprint of both the business and its employees and encourage them to reduce their mileage.
A total of 113 cars have so far either been delivered or ordered to date under the scheme, making it already one of the largest company car salary sacrifice schemes so far implemented.
Car fleet manager Dennis Dugen said: ‘The scheme is helping WSP achieve economic and sustainability objectives as the funding structure encourages employees to choose low emission cars and cut their mileages. Simultaneously we are also encouraging employees to “smart” work, work from home and use video conferencing to reduce their business mileage. As well as delivering financial benefits to the company and employees, WSP Advantage is also benefiting the environment as vehicle emissions are reducing alongside mileage as employees are thinking how necessary both business and private journeys are before making them.’