Step 1: Calculate The Cash
Even if you have just one employee wanting to join an electric car salary sacrifice plan, calculating the pay adjustment required to swap out of a company car is not a step to be undertaken lightly.
You'll need to calculate for the employee in monthly amounts:
- The running costs for swapping pay to a company car, including finance and depreciation, servicing and maintenance, insurance, breakdown cover and fuel (if provided).
- The personal tax and national insurance changes from taking cash instead of a company car.
- The pay adjustment required to leave a net salary that has covered the car running costs.
- Adjustments to pay to compensate for tax/NIC saving and the impact of corporation tax and VAT on your business.
- The impact of an electric car salary sacrifice plan on the National Minimum Wage you must pay your employees.
You may also need to check on the impact of Electric Car Salary Sacrifice on employee pension scheme contributions and their pension benefit entitlements too.
Reducing the earnings of an employee can impact on pension scheme entitlements, so your business or the employee may need to make additional contibutions to the pension plan to maintain employee benefit expectations.
Employees in a Car Salary Sacrifice Scheme will normally be paid above the minimum wage (check this!) and should therefore still qualify for national insurance contributions related benefits (as the threshold for NICs is above that of the minimum wage).
The costs you incur in providing an electric car salary sacrifice plan may not be the same as the payroll costs you have currently - typically there will be savings.
For example, employees will typically pay less tax than on 'cash' pay and your business will pay less employer's National Insurance Contributions.
But as an electric car salary sacrifice plan will normally involve leased car under a contract hire agreement, there are restrictions on the VAT you can recover on car leasing.
Fortunately we have a calculator to do the hard number crunching for you - you can take a look at our electric car salary sacrifice calculator by clicking on this link, so once you've quantified the difference in net pay you can then move on to Step 2.
Now, you might be wondering why you have calculated the pay impact of an electric car salary sacrifice plan before deciding whether or not to go ahead.
Well, that's because you need to know the cost of what you're planning to do before you get started - it could make or break the proposition.
Which leads to ....
Step 2: Profit or Loss?
There are typically two key reasons for implementing an electric car salary sacrifice plan;
- employer cost savings compared to providing 'cash' pay;
- improved employee benefit offers for recruiting/retaining staff.
Whichever is the underlying motive for offering an electric car salary sacrifice plan, probably the most important impact is likely to be from cost savings compared to salary.
In the current economic climate few employers would want to implement an electric car salary sacrifice plan which would add significantly to operating costs.
So that means identifying whether or not an electric car salary sacrifice plan will save your business money on your employment costs or if any could any cost increase be offset by sufficient enhancements to employeer recruitment, retention and motivation to make it worthwhile?
It's beyond the scope of this article to answer the last point - it's so subjective that HR practitioners, consultants and employees will all happily engage in hours of debate on the pros and cons, so we're going to concentrate on the quantifiable impact of a switch to an electric car salary sacrifice plan.
How To Quantify Costs
Assuming you've already followed Step 1 and calculated the cost impact for your business then you'll need to:
- Calculate the employer's national insurance costs/savings of the swap.
- Decide whether or not the salary sacrificed will still qualify for benefits such as pensions, etc, and the associated cost.
- Identify the net business cost impact of a swap after changes to business tax relief and recoverable VAT on cash compared to company car running costs.
You'll need to do this for every level in your existing payroll hierachy where you aim to provide an electric car salary sacrifice plan.
Multiply the individual payroll savings at each grade by the number of employees eligible for to participate at each pay level.
The resulting number is your maximum cost saving of a change to an electric car salary sacrifice plan and your highest cost-risk point, i.e. if everyone eligible for salary sacrifice decides to take it.
Also factor into the calculations the cash-flow impact of switching from cash pay to company cars, particularly if you nromally buy your company cars outright.
This is because swapping to an electric car salary sacrifice plan can change the cash-flow profile of the business compared to providing cash pay instead and can also have implications for the company balance sheet if your choice of funding for the new company cars must be declared on the balance sheet under accounting rules.
Once again our salary sacrifice calculator will take you through this for an employee.
Step 3: Create An Offer
If your employees haven't purchased new cars previously, you will need to explain to the employees the obligations that will go with having a company car, such as lease company requirements on vehicle condition and servicing/maintenance,
You may also need to engage a specialist company in the field of providing cars under salary sacrifice - not all leasing and maintenance/fleet management companies can/will do it.
You may also wish to consider any need for restrictions or conditions on:
- The types of vehicles chosen (e.g. do you prohibit 2 door cars or hybrid/petrol/diesel cars, etc).
- The age/replacement cycle for the cars.
- Will new cars be required or can used cars be included (important during the current shortage of new cars).
- How will ongoing maintenance/MOT records be managed for you to ensure vehicles are roadworthy?
You'll now need to put together an offer to your employees. How you do this will depend on:
- the current employment contract position of your existing pay in relation to the National Minimum Wage; and
- how much you will share with your employees in terms of any employer cost savings from an electric car salary sacrifice plan.
We recommend that, unless your business has HR specialists with the right technical knowledge, you speak to your company employment lawyers and tax advisers about the changes you propose.
In particular this is to ensure the offer you make to employees for the electric car salary sacrifice plan complies with employment legislation, particularly in regard to the minimum wage and tax legislation.
In addition, you need to ensure that the offer also complies with the complex rules on employee taxation where company cars and cash become interchangeable - your tax advisers will guide you on this but we've also explained the issue here.
Ensure that your offer is documented appropriately and communicated to eligible staff and you'll also need to explain the offer to employee representatives/trades unions or staff associations if applicable.
Irrespective of the scope of the electric car salary sacrifice plan you will need to decide and communicate how the offer will be structured, e.g. will employees have:
- A one time offer to swap to the plan, with no way back to higher cash pay for those who do accept and no future offer of company cars for those who don't take the offer.
- A recurring offer which will be available each time an employee's car is due for replacement or periodically for those who take cash (beware of the tax implications of this).
Step 4: Transition The Change
When you're ready to start implementing an electric car salary sacrifice plan you'll need to manage the transition from a higher salary to lower pay and company cars.
Consider carefully the pace at which employees who have opted for membership in the electric car salary sacrifice plan can decide on a car - the employee's decision may take a while as employees consider the car and the personal pay and tax implications of a swap.
The decision-making process may take much longer for employees than it would take for your business, especially as the employee is now responsible for a brand new car.
Look carefully at the documentation you will want to see evidencing or managing:
- on-going maintenance of the vehicle, particularly statutory items such as an MOT; and
- driving licences, particularly if employees pick up penalty points or driving bans as both can impact on insurance costs.
Make sure you have procedures in place to manage and monitor all of this and, possibly, sanctions for non-compliance by employees.
Step 5: Monitor And Review
Swapping to an electric car salary sacrifice plan brings in new responsibilities for ensuring the safety of your employees when driving, especially if they do so on company business.
Your business will have a duty of care to your employees when in the company car and must prove that you have exercised due diligence in monitoring the condition of vehicle, espcially when used on business motoring.
In particular you'll still need a means of verifying on a regular basis that cars used on business motoring comply with the law (including being maintained in a roadworthy condition), plus having a valid MOT certificate (where appropriate).
Put in place a feedback process for employees who take the electric car salary sacrifice option to provide information on issues related to running a company car.
You should at least consider monitoring:
- ease of employee access to the plan and any problems encountered with these;
- car usage behaviour - e.g. does the swap to promote employees using their cars less and taking public transport or using other means of communicating with customers/suppliers;
- actual company car running costs vs the pre-implementation projected costs;
- tax and NIC changes - the current low tax rates for electric company cars may be eroded over time as HM Treasury loses income from company cars; and
- you'll need to monitor employee morale/motivation and keep in touch with changes in employment law.
And Finally ....
Swapping cash pay to an electric car salary sacrifice plan is only the beginning.
As with any part of your business environment you'll need to refine and enhance the package in response to:
- changing business conditions;
- employment and tax law revisions; and
- employee behaviour in response to living with both an electric car and a car salary sacrifice plan.
Not least you'll want to check that the electric car salary sacrifice plan delivered what you set out to do at the beginning.
Remember too that this article is focussed on the key steps in switching employees from cash pay into a company car.
There's a lot more detail to be covered when you embark on the process, so check all available sources of detailed information and analysis at every stage.
Don't be afraid to ask for help!
Employee Guide
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