Asset finance: salary sacrifice car schemes gathering speed?

James Russell is Head of Sector’s Advisory Services division and is an Asset Finance specialist with over 15 years’ experience in providing asset finance advice to the public sector.

The principle of salary sacrifice is nothing new in either local government or the NHS, having been used widely for childcare vouchers, computers and cycle to work schemes. Interest is now growing in the provision of staff cars under such a scheme – there are now around 10 to 15 local authorities with schemes in place for providing employee cars through this approach under their pay and benefits policies. There are a variety of reasons why these are being established, some are being established as replacements for car lease schemes that have been cut due to mounting pressure on budgets, while others have adopted this approach having seen an opportunity to put in place a zero cost (to the employer) staff benefit, at a time when staff benefits and conditions are generally under threat. Some authorities are also seeing these schemes as an opportunity to reduce ‘grey fleet’ risks and to reduce or at least better manage business mileage costs. In addition it has taken some time for the providers of these schemes to develop a mature and robust product which suits the needs of the local government sector.

The schemes that have been established to date have largely been procured as one-offs due to the absence of a comprehensive and fully compliant national framework contract and there is no doubt the potential time and costs associated with procuring a scheme was putting off some potential users. However, a new framework is now available, established via an OJEU procurement process by Mid and West Wales Fire Authority, with assistance from Sector. This can be accessed by all public sector organizations in the UK and gives access to six leading providers.

Some of the key features of salary sacrifice car schemes include:

• The employer benefits from reduced cost of National Insurance contributions
• The employee gives up a proportion of their salary equivalent to the lease cost but before tax and NI making it financially attractive
• A wide choice of makes and models of cars can be leased by the individual.
• A member of staff can have more than one car under the scheme.
• The member of staff benefits from the employer’s manufacturer discount terms, which are not available to a retail customer.
• The arrangement helps organisations to minimise “grey fleet” issues caused by employees using their own cars on business travel.
• Carbon footprint can be controlled by placing an upper emissions limit on the choice of cars.
• There is an opportunity for employers to reduce the cost of business mileage.

Under these arrangements the car is leased by the authority and made available to the employee and is therefore classed as a company car for personal tax purposes. However, the savings generated by the structure of these schemes more than compensates for tax paid on the benefit in kind. A consequence of this arrangement is that, as the lessee is the authority, there are no credit checks on the individual staff member. Risks associated with these schemes, such as early termination of the lease through redundancy or resignation, can be offset by insurance included by the scheme providers.

As these schemes develop and mature, some of the companies providing them say they are beginning to see take-up rates – the proportion of eligible staff ordering cars – approaching 10% over a typical 3 year term.

Time will tell as to whether salary sacrifice car schemes will become common place in the local government sector but current interest would indicate that they are gaining ground as a new way for local government employees to procure a new car.