The Pros and Cons of Salary Sacrifice Schemes

Unless you are already aware of what this term means, salary sacrifice schemes are when an employee will agree to give up part of their wage in return for a non-cash benefit, which is ideally exempt from tax and National Insurance.

Seeing as these can be mutually beneficial for both the business and members of staff, it is becoming an increasingly popular practice. However, it is natural for some people to be a bit wary of agreeing to this course of action, because they will be earning less and might not be making this up through the scheme.

At the same time, organisations interested in implementing salary sacrifice must also know for sure that they won’t be paying out more money in the long run. When it comes to cars, there are a number of initial costs and ongoing expenses that will need to be taken into account before a final decision can be made.

So, what are the pros and cons associated with salary sacrifice schemes?

Potential pitfalls for businesses

At this moment in time, one of the things stopping several businesses from introducing salary sacrifice schemes relate to the risks involved. Although an article on Fleet Point reveals that a well-implemented scheme can save companies between £200-500 per employee over a three-year period in National Insurance contributions alone, concerns are generally related to employee absenteeism.

For example, if a member of staff was to take maternity leave, the organisation would then gradually reduce their pay. However, the monthly salary sacrifice contribution towards the car would not be changed, while the vehicle would not be taken away either.

On top of that, numerous businesses will want to make sure any salary sacrifice scheme is financially bulletproof. Unfortunately, this is near impossible and could increase the costs of joining a scheme anyway, which will result in poor employee uptake.

Another reason why employees haven’t adopted salary sacrifice schemes in the past is because of a lack of understanding, which must be addressed through effective communication by the organisation.

Tentative employees

Although businesses will want to make sure any salary sacrifice scheme makes sense from a financial point of view, the opinion and attitude of employees must also take precedence.

From their perspective, salary sacrifice might not make sense because it could affect things like maternity pay and mortgage applications. Lower earnings may also have an impact on their state pension or other contribution-based benefits such as employment and support allowance.

Life cover could also be affected, as policies through work could be less if it is based on post-salary sacrifice levels. Some businesses will find this obstacle easy to overcome however, as life cover can always be based on pre-salary sacrifice pay.

But because of the concerns of employees, it is imperative to profile members of staff and take their personal circumstances into account to see whether a salary sacrifice scheme would be worthwhile. In addition to suitability, this should also determine your workforce’s appetite for receiving non-cash benefits.

Organisational advantages

In addition to the aforementioned savings in National Insurance contributions, salary sacrifice schemes can bring about a number of additional organisational advantages. After all, research conducted in October 2013 by the Association of Car Fleet Operators (ACFO) revealed almost half (48 per cent) of respondents that did not offer a salary sacrifice scheme were considering doing so.

In addition to reducing associated grey fleet risks, implementing a salary sacrifice scheme can help attract, motivate and retain staff. While this might not be directly related to turnover and profit, it could result in greater productivity and proficiency from existing members of inspired staff and adept new hires.

If the process of introducing salary sacrifice is taken care of by a specialist firm, it can also be hassle-free and quick to put into practice. Various organisations will feel anxious about the difficulties associated with this kind of scheme, but in the hands of a dedicated provider, the benefits will come to fruition sooner rather than later.

For these reasons, salary sacrifice schemes are now a progressively popular option among scores of enterprises. In fact, research by Employees Benefits found that 6 per cent of employers introduced a new salary sacrifice scheme in 2013. But what does the future have in store for this approach?

The road ahead for salary sacrifice

Those interested in adopting a salary sacrifice scheme for cars might be advised to look towards electric vehicles. This eco-friendly option is bound to go down well with scores of staff but can also provide favourable financial rewards too. In addition to a government grant of up to £5,000, electric vehicles benefit from low recharging costs and just 5 per cent benefit-in-kind tax from 2015-16 onwards.

Salary sacrifice firm Tusker has already introduced this option and runs initiatives to educate employees on the reasons why electric cars make perfect sense.

“Electric cars are definitely coming to the fore,” notes David Hosking, chief executive officer at Tusker. “Clearly, the infrastructure and investment over the last 12 months, and the increase in the number of charging stations available, has helped.”

He goes on to add that the initial cost of around £30,000 for an electric car is actually offset by zero fuel costs and the benefit-in-kind tax breaks. While some might be sceptical or reluctant to have an electric vehicle as their company car, it looks as though the financial and implementation advantages would outweigh any employee trepidation.

The pros and cons of salary sacrifice schemes

Despite the fact businesses are bound to have concerns over the financial implications and risks associated with salary sacrifice schemes, these worries seem to pale into insignificance when compared to the extensive advantages. This is especially true when electric vehicles are adopted as part of any scheme.

Similarly, employees may also be agitated or anxious about things like pension schemes and life cover. But if the details of a salary sacrifice scheme are effectively communicated and tailor-made with the individual’s specific requirements in mind, it can be a great thing for both parties.


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