Salary sacrifice continues to grow as fleets explore funding options

This article has been taken from the FN50 2024 special report, providing insight into the UK’s biggest car, van and truck contract hire, leasing and fleet management.

Salary sacrifice (sal/sac) continues to grow as it reaches its highest market share ever totalling almost 83,000 units, accounting for 6.2% of cars on the FN50 risk fleet.

The funding type, which allows employees to ‘sacrifice’ part of their salary in return for a new car, has steadily been increasing its market share since 2020 and has nearly doubled since the Covid-19 pandemic.

In some cases sal/sac is replacing traditional contract hire as more organisations look to offer flexibility and a more affordable route into electric or lower emission vehicles.

The Government’s Zero Emission Vehicle (ZEV) Mandate requires increasing percentage shares of car manufacturers’ new car sales to be zero emission and fleet is a vital sales channel to achieve targets to avoid costly fines.

Contract hire (operating lease) accounted for the vast majority of the FN50s car risk fleet, with a market share of 85.8%, which is continuing to see share erosion, down from 88.2% last year, as a result of the gain from salary sacrifice.

The number of sole supply deals is rising, with leasing companies reporting that 44% of their customer contracts, on average, are on solus agreements, compared with 40% last year.

There’s a trend for those leasing companies within the top 10 of the FN50 to be heavily weighted towards traditional operating lease contract hire.

For six of the top 10, contract hire accounts for more than 90% of their funded fleet volume, with two reporting that all of their cars are funded on contract hire agreements.

Lex, which is the second largest leasing provider in the FN50, has seen a switch between funding products, rather than what Ashley Barnett, senior manager strategic consultancy at Lex Autolease, says would be described as a “decline in popularity of traditional contract hire”.

Sal/sac upturn

Barnett explains: “We’re seeing an upturn in the use of salary sacrifice among those who have previously opted for traditional company car schemes so vehicles that would previously have been recorded as contract hire will now be sal/sac.

“In addition to this we are seeing previous company car drivers who opted out during rising benefit-in-kind (BIK) taxation move into sal/sac.

“We’re also seeing an uptake in used car leasing/ used salary sacrifice, which is not only attractive from a cost perspective, but also improves sustainability and flexibility with shorter leases available.”

Barnett believes traditional contract hire will continue to dominate as the main funding method for the wider fleet sector as it is the most understood and established route.

However, he acknowledges the funding landscape is showing signs of a shift as fleet operators explore alternative solutions.

“This trend is, in part, driven by evolving operational needs and an uncertain economic environment, but also the different tax advantages that can be gained using some finance products versus others,” he says.

“Rising costs, sustainability goals, and vehicle technology advancements, particularly the growth of electric vehicles (EVs), are also influencing changes.”

The British Vehicle Rental and Leasing Association (BVRLA) says in its latest Leasing Outlook report this summer that the cost-of-living crisis, allied to the ‘sticker shock’ of new lease rentals being much more expensive than for the cars they replace is driving a change in the way fleets approach funding.

The BVRLA has seen the salary sacrifice fleet increase by 63% year-on-year, with some funding executives believing the growth could be even higher than that due to brokers of public sector framework agreements classing the funding type under business contract hire.

Tusker continues to be the sal/sac market leader in the UK, representing 96.7% of its business.

Tusker is positioned as parent company Lloyds Banking Group’s sal/sac specialist, while Lex focuses on its core business of contract hire.

Tusker says it has recorded a “major turning point” for salary sacrifice over the past two years, with both large and smaller companies introducing schemes specifically as a way to attract or retain employees.

Kit Wisdom, Tusker managing director, says the continued growth for sal/sac has been due to the strong interest in electric vehicles.

Approximately 80% of Tusker’s orders in 2024 have been for EVs and 15% have been for hybrids.

Wisdom says: “We’re seeing a mixed, balanced approach where companies are using both contract hire and salary sacrifice to offer their drivers cars which meet their needs and requirements.

“Contract hire remains crucial for traditional company cars, especially for those driving high mileages.

“Running alongside this is salary sacrifice, which opens up opportunities for the broader workforce, including perk and cash allowance drivers, to access EVs while also reducing their tax liability.”

Wisdom says the growth of sal/sac can also be attributed to more employees outside of the traditional company car sector becoming aware of the schemes and EVs more generally.

He says that while there is still the need for conventional company car schemes, salary sacrifice opens up the chance of a vehicle for all permanent employees, provided their salary doesn’t drop below the National Living Wage following the sacrifice.

Reporting changes

Sal/sac will see some changes in the next couple of years as HMRC brings in new rules around how company cars and expenses are reported.

HMRC has announced changes to the reporting and paying of tax and Class 1A national insurance contributions (NICs) on benefits-in-kind. The removal of the need to report benefits on P11D forms, set to take effect from April 2026, will impact both employers and employees.

The changes will actually simplify and remove frustrations for some that have felt there have been inconsistent tax deductions and delayed payments.

So, while employers will need to prepare for the changes, Tusker is predicting a continued increase in salary sacrifice, particularly with the 2035* deadline for the ban on the sale of new petrol and diesel vehicles looming as employers look to familiarise employees on EVs.

Tusker also expects to see additional growth from salary sacrifice with used cars. The business launched its pre-loved car offering in September in order to bring down the price of entry to newer vehicles for a broader range of employees.

Changes to future BIK rates could be a potential risk factor for the continued growth of EVs with fleets, including sal/sac as a funding method.

Wisdom adds: “Foresight of these BIK rates are key for drivers to know what they’ll be paying post-April 2028.

“Keeping BIK rates low for EVs will be crucial for the continued success of EV adoption in order to meet the ZEV Mandate’s targets.”

* This date may revert to 2030 based on Labour election pledges