A salary sacrifice is one way to reward your employees for their hard work. It works by effectively managing and reducing their gross income, in exchange for signing a car contract. Your employees will be able to enjoy a new, fully insured car that has a low carbon footprint – usually at a low cost. Additionally, your employees will also save on tax. The good news for employers granting a salary sacrifice is that it increases the loyalty and motivation of employees, plus, it will also increase your company fleet, entitling you to a larger manufacturer discount (granted that all the cars come from the same manufacturer or company). Before we proceed to the advantages of salary sacrifice, how does salary sacrifice reduce tax?
Tax Reduction for Employees
Let us assume that James and Chris (fictitious employees) both work in the same company, both of them earning £50,000 a year. James makes a salary sacrifice of £10,000 for a vehicle. Chris, however does not sacrifice any of his salary.
Note: all values stated are purely imaginary and are a means to show the tax benefits afforded by a salary sacrifice. Other variables are not included in the computation.
|Income Tax (12%)||(£4,800)||(£6000)|
Based on the table, we can clearly see that Chris ends up paying more tax than James. This is because a salary sacrifice reduces the taxable income before the tax deduction, resulting in a lower tax payment. Not only does James gain a new car, he also saves on tax.
Advantages of a Salary Sacrifice
- Affords tax discounts by effectively reducing the taxable income.
- There is no capital and deposit required. Once the employee agrees with the salary sacrifice, that`s about all that`s required.
- There is no need to save money and wait for a long period of time before getting your vehicle – you can get the car right away and at a lower price.
- Salary sacrifice vehicles are invariably brand new, with at least 3 years warranty and maintenance cover.
- There is no need for the employee to go to the car manufacturer to make the monthly vehicle payments. Payments will automatically be deducted from the employee’s salary.
- It comes with a Guaranteed Auto Protection (GAP) insurance that covers the value of the car on the date of purchase. Most insurance companies only cover the market value (current value) of the car. Therefore, GAP would be most advantageous. For example, an employee buys the car for £10,000 using salary sacrifice. If in two years, its value drops to £8,000. GAP policies will cover the £2,000 difference in current value and the car will still be deemed to be worth £10,000.
- There is a low risk involved since the salary sacrifice management comes from the third party company. There is no additional management needed from the employer`s side. The fleet is also handled by them, with no need to hire additional employees to handle all the transactions and fleet management.
- Granting a salary sacrifice in exchange for a new car will boost employee morale. It will make them work harder and more efficiently, which translates into better output and ultimately more income.
For the employers, before you get into this kind of an agreement, it would be wiser to choose a company that is noted for its fleet management services. A good company will provide a lot of options and plans that not only benefit you but also your employees in the long run. ALD Automotive is a leading fleet management company, known for its excellent fleet management and vehicle leasing solutions. Whatever your vehicle needs, ALD Automotive can deliver.