3 Little Known Facts About A Salary Sacrifice Car Scheme

11 October 2021

3 Little Known Facts About A Salary Sacrifice Car Scheme

The most popular benefits of salary sacrifice car schemes are well known by most employers and employees, namely that they are a cost-effective way for employees to drive a new low-emission vehicle. But when assessing the viability of a scheme being promoted by your organisation, there are some lesser-known elements of such a scheme that you need to be aware of. Here we have highlighted three which could have big implications for employees of the business.

  1. Your pension ‘could’ change

A salary sacrifice car scheme takes some of your pre-tax salary in exchange for paying towards a new vehicle. People therefore assume that this lower salary figure is subsequently used to calculate other benefits such as your pension. But that’s not necessarily the case, it depends which type of pension scheme you have.

Most companies run one of three different types of pension scheme. A notional pension uses your pay rate before the salary sacrifice figure is taken off, so doesn’t affect your pension. However, if you have a defined benefit pension, such as a career average scheme, this looks at an employee’s average pay over the course of their career, so this would be impacted, because the salary sacrifice scheme will reduce your average earnings and therefore your pension contributions.

If you have a final salary pension scheme, you have the option of exchanging some of your salary in the years before retirement towards a salary sacrifice scheme, this would therefore reduce the amount the pension is calculated on. However, you could stop the salary sacrifice agreement prior to retirement, and even if you didn’t, the nett effect of a salary sacrifice scheme over what you lose on pension, might still benefit you anyway.

  1. Paternity or maternity leave shouldn’t affect it

Employers are contractually obliged to continue with the benefits of salary sacrifice schemes even if you have a period of maternity leave or paternity leave, and even if this results in a period of unpaid leave. Of course, maternity or paternity leave could result in the employee experiencing a significant drop in salary, and a period of unpaid leave definitely will be financially significant, so the employee may decide to withdraw from the scheme in this event anyway, but the employer must still offer the benefits of the scheme until such an instance occurs.

  1. Salary sacrifice schemes can be terminated if an employee leaves

Most salary sacrifice schemes include risk mitigation cover so that employers can terminate an agreement with the vehicle lease company in the event of an employee leaving voluntarily, through redundancy or through illness or injury, and without incurring an early termination fee. This therefore allows the employee to walk away from the salary sacrifice scheme as well as the organisation. However, depending on how the scheme has been set-up, the employee may have an option to re-finance the lease deal privately in order to retain the vehicle, or the employer may opt to pass the same vehicle to a new, replacement employee.

Either way, the employee is not obliged to continue paying towards the vehicle in the event that they terminate their employment.

If you want to find out more about salary sacrifice car schemes then contact Pink Salary Exchange and we can go through the specific details of our schemes and how they will affect you or your business.

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