Salary sacrifice – it’s just BCH with a contract change, right?

ERR, not quite… Salary sacrifice might seem simple but it can be very complicated to implement for any employer, writes Rhys Whitcombe of BCF Wessex (left).

There are so many moving parts it can become difficult to manage if you aren’t familiar with the issues or the process of setting up a salary sacrifice scheme.

The complications range from what to do to protect an employer from early terminations, how bonuses affect the employee’s monthly savings to whether the agreement should be recognised on the balance sheet.

So it’s important to understand salary sacrifice fully before selling and implementing it through your brokerage becomes second nature. It’s more than just BCH by another name.

Salary sacrifice future stabilised

Having recently experienced a rather alarming number of changes within Downing Street, at Number 10 and 11, there appeared to be a distinct lack of confidence that salary sacrifice would remain financially viable beyond 2025. With income tax rates changing several times within the space of a month, and many in the fleet industry fearing a drastic increase of benefit in kind tax rates, the long-term future of salary sacrifice seemed in doubt.

However, last month’s Autumn Statement offered longer-term stability to the automotive industry, while providing the clarity that salary sacrifice should remain extremely attractive for at least the next five and half years, thanks to the extension of relatively low BIK tax rates on zero emission cars.

Hence, there are plenty of reasons to be positive about the future of salary sacrifice for electric cars; the savings available are significant, even when BIK tax increases. Clearly the government has accepted that salary sacrifice provides the incentivisation required to encourage electric car usage as we edge ever closer to the 2030 ban on the sale of new petrol and diesel cars.

But are the practical issues associated with salary sacrifice widely known within the industry?

At BCF Wessex we don’t believe so. We are supporting our broad range of clients to promote and implement salary sacrifice by helping them deal with the wide-ranging technical challenges that implementation faces.

Although salary sacrifice is a relatively simple concept, there are a number of factors which mean implementation and operation can be more complex than anticipated. Factors such as an employer’s VAT position, the payment of pension contributions, the addition of options to cars, and how employer NI savings are shared with employees will complicate any scheme, and possibly generate incorrect quotations if the calculations are not completed properly.

And, what about the application of output VAT on the salary sacrifice itself, whether it’s subject to the lease accounting rules, or the customer would like to include the charge point, and even solar panels, within the salary sacrifice agreement?

There are potentially so many factors to consider when setting up a scheme it’s imperative to discuss scheme design and prepare a comprehensive policy with the customer to ensure that as few issues as possible surface further down the line.

Salary sacrifice and early termination

One of the greatest challenges facing any employer wishing to implement a salary sacrifice product is how to mitigate the risk of early termination fees.

There are two main approaches to this: the first is insurance or protection; the second is to use the employer’s National Insurance savings to cover any potential costs.

Each has its merits but taking out a formal early termination policy can be costly and limit the scenarios in which a pay-out will be made, whereas self-funding from NI savings offers greater flexibility, exercisable entirely at the employer’s discretion.

Remuneration can complicate salary sacrifice provision

Meanwhile, how an individual is remunerated can affect their possible salary sacrifice savings, and it may mean salary sacrifice is not the most financially beneficial solution. For example, if the person is an owner-director of their company, they may take dividends as their main source of income, meaning salary sacrifice wouldn’t offer the same savings as it would for a director paid predominantly via salary; dividends are taxed at lower rates than salary, and no NI is due on dividends either, limiting the savings even further.

Additionally, when an employee receives bonuses, commission, or other performance related pay their savings from salary sacrifice may fluctuate wildly from month to month, or it may even mean their exclusion from a scheme because of the precise operation of the National Minimum Wage. The National Minimum Wage itself raises a number of practical questions which a leasing broker should be aware of even though it is the remit of the employer to ensure that none of its employees breach the minimum wage.

Ensure correct HMRC reporting

And, of course, the employer must complete the HMRC reporting for each and every car it adds to the company’s salary sacrifice scheme. Luckily though, the reporting needed for a salary sacrifice car is identical to that of a normal company car. But, what about the operation of the salary sacrifice itself – how complicated is that and what must be done if the employer has decided to payroll benefits?

Salary sacrifice - huge potential for brokers

Overall, salary sacrifice offers a potentially huge opportunity for leasing brokers but its implementation can either be made simple, or complicated, depending upon whether you ask the right questions.

At BCF Wessex we offer a wide range of options to help leasing brokers write salary sacrifice business, along with a suite of documentation and market leading expert knowledge which could help you offer salary sacrifice to your customers and start making the most of the opportunities available.