Five things employers need to get right with a salary sacrifice car scheme

What does a well-run salary sacrifice car scheme look like in today’s market?

As tax incentives mature and manufacturer discounts become less predictable, employers can no longer assume salary sacrifice will sell itself. Whether you’re launching a new scheme or reviewing an existing one, getting the fundamentals right now matters more than ever.

Salary sacrifice has become a mainstream employee benefit and for many organisations, it is integral to reward and sustainability.

As the market evolves however, and residual values continue to fluctuate, schemes may need more hands-on management than they did a few years ago to ensure value for money.

The business case for salary sacrifice is still a strong one, but so too is the need to get the structure, pricing and governance right from the outset.

Here are five things you need to think about.

1. Look beyond launch success

Ultra-low Benefit-in-Kind (BiK) rates for electric vehicles (EV) made schemes extremely compelling in the early days of salary sacrifice, and uptake was particularly strong.

EV BiK remains low by historical standards, but it is now rising year-on-year.

Today, incentives still help, but employers need to check that their scheme remains affordable and should consider how it will hold up over the next few years. They need to understand how pricing is set and how the scheme will respond if market conditions change.

Uncertainty around residual values is also something employers need to be aware of. As discounting and used EV prices change, lease pricing can also change.

A well-designed scheme should prevent sudden jumps in monthly costs and make any changes easy to understand.

2. Keep the scheme affordable and accessible

Affordability checks linked to National Minimum and Living Wage rules remain one of the biggest barriers to participation. As monthly rental costs rise, employers need to consider who can access their scheme.

Pricing structures play a key role here. Differences in leasing and maintenance costs between funders can be significant, and no single funder consistently offers the best price on every vehicle.

Schemes that rely on just one lender can end up limiting the number of employees who can afford to take part, particularly lower-paid employees.
By contrast, a multi-bid pricing model, such as that used by Fleet Operations’ SalAd scheme – where more than one lender is asked to price a vehicle – can help to keep monthly costs competitive and limit any price increases.

Employers should also review take-up across pay bands and ensure their scheme is accessible to employees at all levels.

3. Align salary sacrifice with recruitment and retention

Access to an affordable vehicle can be an attractive ingredient of an employee’s reward and remuneration package.</p:
Removing the upfront purchase cost makes the opportunity to have a new car, particularly an EV, more realistic for employees who might otherwise delay the switch.

This only works, however, if a scheme feels credible and stable. Unexpected price changes or poor communication can quickly erode trust.
HR and fleet departments should make sure employees understand how pricing works, what happens if tax rates change and how the likes of maternity leave or redundancy are handled.

Employees need to know what happens if their circumstances change. Clear policies and simple processes are key to building confidence.

4. Make it a shared responsibility

As schemes grow, the scrutiny they come under tends to increase.

Finance departments want clear forecasts, procurement teams want pricing to be competitive, HR professionals shine a spotlight on fairness and consistency while fleet teams are concerned with day-to-day delivery.

Salary sacrifice should therefore be managed jointly by all relevant teams, rather than being treated as a standalone benefit.

Employers should also be clear on how pricing is reviewed.

How often is the pricing reviewed and updated? How easily can costs be revisited if market conditions change?

Clear answers to these questions can make it easier to manage costs and expectations further down the line.

5. Avoid unexpected cost increases

In today’s market, stable costs can matter just as much as initial headline savings.

Employees will often be quick to notice small changes to their monthly salary deductions and board-level execs, meanwhile, can be quick to question value if costs start to creep up.

Although no scheme can entirely negate market movement, if they are well designed, the risk of sudden jumps can be reduced. Cost changes should not come as a surprise and they should always be clearly explained.

Employers should review pricing regularly and update it where appropriate.

Getting it right in a maturing market

Salary sacrifice continues to offer clear benefits, from supporting electrification and strengthening the employee proposition to contributing to measurable carbon reductions.

As incentives mature and discounts become less pronounced, however, schemes need to be more careful managed.

Those employers who treat salary sacrifice as a long-term management tool, rather than a short-term incentive, will be best placed to manage costs effectively and maintain employee trust.

If you would like to review how your current scheme is structured, or discuss the benefits of a multi-bid model, contact our team of experts today.