Salary sacrifice car schemes explained

Salary sacrifice car schemes have a lot of appeal, but employers need to check out all the facts before getting a plan into gear.


  • Salary sacrifice company car schemes may not be suitable for every employer.
  • The most common barrier to introducing a scheme is lack of understanding about cost and implementation.
  • Employers should engage a qualified tax adviser to ensure deductions from salary are dealt with properly.

Salary sacrifice company car schemes are a popular feature of many organisations’ employee benefits packages, but confusion remains over how they work.

Here, Employee Benefits asks the fleet industry to dispel the myths and explain exactly how schemes operate.

1. The top myths about salary sacrifice car schemes include: 

  • There is no cost to the employer. 
  • Employers do not have to amend employees’ contract of employment.
  • The same scheme can suit all employees.
  • The contract for the car is in the employee’s name and owned by the employee.
  • The schemes are a replacement for a company car.

Mike Belcher, head of sales at Hitachi Capital, says: “The biggest myth is that a salary sacrifice arrangement is a panacea for car schemes. While a scheme in the right organisation will work well, a badly designed scheme in the wrong type of organisation can be a disaster.”

Roddy Graham, commercial director at Leasedrive Group, adds: “There is no off-theshelf scheme that fits all staff, such as essential users, perk drivers and affinity drivers. Different audiences require different scheme variations.”

2. Reasons why employers offer a scheme include:

  • National insurance (NI) and tax savings for employers and employees.
  • Low-cost implementation for employers.
  • A cost-effective benefit in lieu of salary rises for employees.
  • Inclusion of maintenance, servicing, breakdown cover and insurance.
  • Take-up of low-emission cars, which not only attract the biggest tax breaks, but appeal to employers with a corporate social responsibility (CSR) agenda.
  • Contribution to employee engagement, recruitment and retention.

Andrew Hogsden, senior manager at Lex Autolease’s strategic fleet consultancy, says: “When offered as part of an enhanced benefits package, salary sacrifice schemes can be a powerful tool to help recruit, retain and motivate staff.

“But it is advisable for employers to investigate whether a salary sacrifice scheme is appropriate for their needs and not assume it can substitute for traditional car schemes and achieve cost savings.”

3. Reasons why employers do not offer a salary sacrifice car scheme include:

  • Employee population may not suit a scheme because of high staff turnover, a large percentage of workers earning close to the minimum wage, or a projected small number of participants.
  • A general lack of understanding around the scheme, such as the perceived time, cost and difficulty in implementing it.
  • The fear of costs arising for the employer because of scheme users who take maternity leave or long-term sick leave, or who are made redundant.
  • The fear of complicated tax and legal issues arising.

Ian Hughes, commercial director at Zenith, says: “It is important to recognise that salary sacrifice car schemes do not suit all organisations. Some employers choose not to implement a scheme because they have a fairly small employee population.”

Jon Burdekin, head of corporate account management at Alphabet, adds: “Employers sometimes find the idea of salary sacrifice for cars offputting until they understand it better.

It can sound quite complicated at first, so organisations tend to overestimate how long it will take to set up a scheme. As with any benefit, they will also have to think about maternity breaks and what to do when employees leave.”

4. Considerations for employers implementing a scheme include:

  • The need for buy-in from all parts of the business, including HR, finance and procurement. All parties should work together at the outset so the scheme can be implemented as cost-effectively and efficiently as possible.
  • The need to obtain tax advice, and HM Revenue and Customs (HMRC) clearance.
  • The implementation of internal processes so that salary deductions are dealt with correctly, including payroll and P11D reporting.
  • The creation of an online platform, so employees can choose a car that meets their requirements. It should highlight the tax and NI savings that can be made and explain how the scheme works.
  • Employee communication, which should be at the forefront of any implementation project.

David Hosking, chief executive officer at Tusker, says: “Communicating the details of the scheme is vitally important to ensure that employees get the most from it.

“It is equally important to understand the target audience to ensure the right messages are being communicated.”

5. Tax and legal considerations for employers include:

  • Appointing a qualified tax adviser. Employers should take independent tax advice and obtain clearance from HMRC to ensure the tax treatment is correct and that deductions from salaries have been dealt with properly.
  • Ensuring employees understand that they will also incur a benefit-in-kind tax on the car.
  • Ensuring employees are aware of future tax that could affect them.
  • Ensuring that there is a change to employees’ contracts of employment to show that a salary sacrifice will arise.

Alastair Kendrick, tax director at MacIntyre Hudson, says: “It is important that employers looking to introduce a salary sacrifice arrangement undertake detailed research and take good tax assistance.”

Helen Fisk, AutoSolutions manager at ALD Automotive, adds: “Employees can use a comprehensive modelling package that details how much less tax and NI they could expect to pay when choosing a specific car.”

Salary sacrifice company car schemes can be a valued perk if this fits with an organisation’s employee population, takes account of tax and legal considerations and is implemented with detailed communications to employees.

With all these factors in place, there is no reason why a scheme should not work for employers and employees alike.




Helping lower emissions to take off

National Air Traffic Services (Nats) introduced a salary sacrifice car scheme in March 2012 as part of a wider programme to support its 4,500 employees in making low-emission travel choices.

Ian Jopson, head of environment for the air traffic management organisation, says: “Economic conditions are difficult across all industries today, but our focus remains on finding innovative solutions to support our staff in driving down our carbon footprint.”

The scheme, provided by Zenith, caps vehicle emissions at 120g/km, which increases the savings available to staff: the lower a car’s carbon dioxide (CO2) emissions, the lower the benefit-in-kind tax payable.

Since the scheme’s launch, more than 200 new cars have been ordered. The average CO2 emissions for all cars on order is 106g/km.

Jopson adds: “This is a great scheme because it gives us another way to reduce environmental impacts and it can save money too.”

Source: Tusker’s Driver survey, conducted among 1,000 salary sacrifice car scheme users in March 2012, published in July 2012