Demand for company car salary sacrifice schemes is expected to increase as sensitive employers look to introduce innovative funding solutions to help staff make tax savings, according to Inchcape Fleet Solutions (IFS).

Household budgets are already coming under significant pressure as rising energy and commodity prices, including essentials such as domestic heating and food, put a major squeeze on salaries with the inflation rate at 4.4% and predicted to rise further.

Additionally, from 6 April hundreds of thousands of employees face tax rises as a result of changes in tax thresholds and both they and their employers will see National Insurance rates increase by 1%.

Steve Archer, fleet services director, Inchcape UK, said: “It therefore makes economic sense for employers and their HR directors to help their valuable staff to make every pound stretch as far as possible. Introducing a salary sacrifice scheme is one method.

“Salary sacrifice works best when substituting salary for a taxable benefit at a much lower rate.

“With take home pay for many employees set to reduce and benefit-in-kind tax rates favouring low emission company cars, employees can potentially save themselves money by sacrificing some of their salary and using it to fund a car with low CO2 emissions.”

While the financial benefits of a company car salary scheme are individual to each employee, Inchcape Fleet Solutions calculates that a basic rate tax-paying 37-year-old living in the Home Counties with a no claims bonus of six years or more could obtain a Volkswagen Polo 1.2 60 S three-door (128 g/km CO2) with a P11d value of £9,940 at an estimated net monthly average cost to themselves of £175.47 on a 36-month/30,000-mile contract.

Making similar employee assumptions, a person driving a BMW 116d Sport three-door (118 g/km CO2) with a P11d value of £19,185 would be able to fund the car through their employer under the Inchcape Fleet Solutions’ ‘IFS Justdrive’ salary sacrifice programme at a net monthly average cost to themselves of £289.16.

The estimated gross monthly cost to the employee of the Volkswagen Polo is £250.06 - vehicle costs of £194.25, SMR costs of £17.03 and fixed term motor insurance of £38.78 - however, that figure would be reduced by £30.32 a month to £219.74 as a result of their employer passing on monthly National Insurance savings due to the salary reduction.

Additionally, the employee will make monthly tax and National Insurance savings totalling £70.32 as a result of sacrificing some of their salary for a company car but will pay £26.05 per month in benefit-in-kind tax on the Polo.

Therefore, ‘IFS Justdrive’ salary sacrifice calculations reveal a monthly tax efficiency saving to the employee of £44.27 with the net cost of running the Polo being £175.47 a month (£219.74 - £44.27).

Similar calculations relating to the BMW 116d reveal that the estimated gross monthly cost to the employee is £398.89, which is reduced to £350.52 a month as a result of their employer passing on monthly National Insurance savings of £48.37 following the salary reduction.

Additionally, the employee will make monthly tax and National Insurance savings totalling £112.16 as a result of sacrificing some of their salary for a company car but will pay £50.80 per month in benefit-in-kind tax on the BMW.

Therefore, ‘IFS Justdrive’ salary sacrifice calculations reveal a monthly tax efficiency saving to the employee of £61.36 with the net cost of running the BMW being £289.16 a month (£350.52 - £61.36).

All figures quoted relating to income tax, National Insurance and benefit-in-kind tax are a blended rate over the contract term based on published figures at time of publication.

Archer said: “Careful vehicle selection is crucial to make company car salary sacrifice schemes as tax-efficient as possible. However, our calculations show that choosing the ‘right’ vehicles can deliver tremendous value for money for staff. It is impossible to run such vehicles privately at such a low cost.

“A further benefit of low emission models is that they offer top-class MPG thereby ensuring that even with fuel prices at record levels value for money is obtained.”

He added: “I would urge businesses to help their employees make every pound stretch as far as possible and give their staff the option of driving a company car through a salary sacrifice scheme, such as Inchcape Fleet Solutions’ ‘IFS Justdrive’ programme.

“Company cars continue to be hugely emotive for employees and a powerful recruitment and retention tool. If staff can take to the wheel of a new car and make financial savings that will enable their household budgets go further then employees will be appreciative.”

Additionally, employers can also make financial savings with 100% first-year capital allowances available on cars emitting 110 g/km or less in addition to National Insurance savings as a consequence of paying a lower salary.

“With rising inflation and tax increases we believe salary sacrifice can play a major part in companies’ remuneration strategy in relation to cars,” concluded Archer.

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