Fleet owners have been taking advantage of salary sacrifice schemes for years, but now the rules are changing. Here’s an overview.
What are salary sacrifice schemes?
Salary sacrifice schemes allow employees to exchange part of their salary for a company car, which is classed as a “benefit-in-kind” and taxed at a lower level.
Effectively, this means the employee is getting more value for the basic salary, and the employee also benefits as no tax or national insurance is paid on the sacrificed earnings.
Typically, if an employee leaves a business, the salary sacrifice scheme will be terminated, which will incur an early termination fee – sometimes there will be the option to buy the car outright.
It is worth bearing in mind that a business is legally required to provide all the benefits of a salary sacrifice scheme even when an employee is out of work for parental leave.
Why have they been in the news so much?
It is not hard to see why such schemes have been popular in the past – or why they were targeted for reform in chancellor Philip Hammond’s 2016 Autumn Statement.
The announcement was controversial, as many saw it as an end to salary sacrifice schemes – but new legislation suggests the new rules were designed to encourage lower emissions vehicles.
Although still liable for benefit-in-kind, there will still be savings available for almost all drivers, with the largest savings for those who choose an ultra-low emission vehicle.
Ultra-low emissions vehicles are defined as those with emissions of 75kg/km of CO2 or less.
The Finance Bill 2017
The Finance Bill reportedly aims to make the tax system fairer by cracking down on avoidance and evasion.
Mel Stride, financial secretary to the Treasury and paymaster general said: “A fair tax system is a key part of our plan to build a fairer society.
“The UK is a world leader in tackling tax avoidance and evasion, but we must continue to take action to ensure everyone pays their fair share. The Finance Bill will allow us to do just that by preventing companies and individuals from using complicated tax structures to avoid paying the tax they owe, and penalising people that help them to do it.”
The future of salary sacrifice
It may all sound a bit drastic on face value – plenty of employers will have been making use of salary sacrifice schemes for years without considering it unfair or tax avoiding, it’s simply been a scheme available to help business owners. Many people, fleet owners especially, may have come to rely on it.
The important thing to remember going forward is that the scheme is not being scrapped – the rules have just changed. Make sure communication with employees about their options is clear.
The takeaway here is that there are still benefits to be had, as long as you go for ultra-low emissions vehicles.