SACRIFICE your salary? Doesn’t sound like a great idea – but maybe not as bad as you think.

For SMEs it can be very beneficial when it comes to business motoring.

What is salary sacrifice?

Salary sacrifice is an agreement where an employee accepts a lower salary but in return receives a benefit from their employer.

Be a bit careful, though. This is only going to be worthwhile so long as the employee pays a lower rate of income tax on the benefit than they would have paid if they had taken the salary.

How does salary sacrifice work with cars?

Under a car salary sacrifice scheme an employee foregoes part of their salary, saving the employer the cost of the sacrificed salary and Class 1 National Insurance Contributions.

The employer incurs the cost of leasing the car and pays Class 1A NIC on the benefit in kind.

The salary deduction should cover the cost of providing the vehicle (including rental, maintenance, administration, insurance and so on).

The employee is allowed to sacrifice however much salary they want so long as this does not bring the gross salary below the national minimum wage.

What are the benefits of salary sacrifice?

The employee saves income tax and Class 1 NIC on the sacrificed salary. They have to pay benefit in kind tax but they can keep this low by choosing a low-emission car.

So, salary sacrifice could save money for both the employer and staff that take up the scheme a chunk of money each year. If you want to offer a valuable perk to your employees and encourage a cost effective and environmentally friendly company car policy, salary sacrifice could well be worth investigating.

It’s particularly useful if you have staff who are not entitled to a company car but you want to offer them the benefit

It’s also useful if you have staff who are not entitled to a company car but you want to offer them the benefit as part of your staff retention scheme.

However, the employer will need to consider what happens to the car if the employee leaves – early termination fees can be expensive, although insurances are available to cover this possibility.

Implementing salary sacrifice

Salary sacrifice schemes, like any other, need to be properly implemented, and crucially they need to be fully explained to employees who are likely to benefit from them.

Check with your local Inland Revenue office to make sure that the scheme you want is fully tax compliant as you are altering your employee’s contract of employment.

Salary sacrifice key points

• Your employee choses a car, and you as an employer lease the car from a leasing company
• You then deduct the cost from the employee’s gross salary
• As an employer you get a reduced National Insurance bill although NI is payable on the car benefit
• Your employee saves NI and tax on the sacrificed salary – but is now liable for company car tax
• Salary sacrifice schemes need to be implemented correctly – best to get HMRC approval so you don’t land yourself in hot water over tax
• Watch for early termination charges if an employee leaves half way through the lease
• You will need to ensure the drivers are fully aware of company car policy and that you have a prescribed duty of care process for running company cars
• Salary sacrifice can help retain staff and make your SME business and attractive place to work