Don’t let salary sacrifice be a risk

With the opportunity to provide a cost neutral employee benefit, it is no surprise that salary sacrifice has become an increasingly popular option for many businesses, especially as a way of funding high-value benefits like company cars. As appealing as the scheme may seem however, without a well-developed, forward-thinking approach to management and reporting it can easily turn into a costly mistake.

Once an employee benefit has been given, it often can’t be taken away again even if circumstances change – leaving the employer out of pocket as it continues to foot the bill. This means it is absolutely vital for a salary sacrifice scheme to plan ahead and be mapped out well in advance, with contingency plans in place to counter any changes for individual employees and the business as a whole.

Salary sacrifice schemes for company cars are often monitored and reported on in the same manner as standard company car fleets. This commonly overlooks the need for forecasting and forward-thinking analysis. Salary sacrifice is still a relatively new method of fleet funding, so there are few schemes that have been around long enough to see long-term cost results.

Long-term employee absences, such as maternity or sick leave, are one of the most common risks for unprepared companies to sleepwalk into. In the case of maternity leave in particular, while the employee’s wages will gradually be phased out to zero, the monthly salary sacrifice contribution towards their car cannot be altered, nor the car itself taken away.

So where an employee was formerly giving up say, £200 of their monthly take home salary towards the car, the employer may find themselves footing the bill instead for the period of maternity leave.

Another risk that must be forecast is the possibility of an employee leaving the company and returning a damaged car. Usually when returning a vehicle to the leasing provider, the company will have a policy to ensure that the employee settles any charges for damages that were incurred over the period of the lease. If the employee has left the company, however, this leaves the employer potentially exposed to the damage costs.

The same goes for employees with excessive mileage costs at the time of returning the vehicle. It can be written into the policy that the employee is responsible for these costs, however if it is consistently high then it may be worth reviewing the mileage across the whole fleet. If the mileage has been underestimated, the amount sacrificed by the employee generally cannot be altered. The scheme is best suited for low-to-mid-range drivers, and is largely unsuitable for those with high mileage.

The first step in countering risks such as these is to create a model with all of the variables to predict the risk of maternity leave, vehicle damage, and so on – very much like an insurance company might. From this you will be able to factor in a financial contingency per vehicle per month. Some companies actually go on to take out insurance on the value of these risks, but I recommend against this as it can be quite expensive.

The second thing to consider is market intelligence (MI) reporting. You must have a handle on the business’ future income through the scheme against the liabilities highlighted in the salary sacrifice scheme. The company must ensure that the scheme financially secure enough to counter the risks of any issues that may come up. This is particularly relevant when factoring the size of any contingency fund. These types of schemes are driven predominantly by the price. Therefore any amount that a company factors in to offset risk can then have a detrimental impact on the scheme success. This is a critical balance to strike.

All employees signing up for the scheme must be involved in conversation with their fleet supplier and must fully recognise their own role and responsibility. While there are a lot of financial factors at play, this really boils down to employees having a firm understanding of the impact on their take-home pay.

Employees making use of salary sacrifice will also need to make arrangements concerning their taxes, and those who are left ill-informed and overlook this task could be in for unpleasant surprise after going months on the wrong tax code. The leasing company can advise the employee on the exact changes to their take-home pay and the process they’ll need to follow.

Companies that approach salary sacrifice armed with an in-depth and forwarding thinking analysis will receive an effective cost-neutral benefit for employees and business alike, and avoid any nasty surprises.

Author: Mike Belcher, head of sales at Hitachi Capital Vehicle Solutions