Demystifying company car schemes

If you’re an employer, how do you recruit, motivate and retain the best employees? Pay them well, of course. But that’s only part of the answer. In recent decades, supplementary rewards have become increasingly popular, and increasingly important.

Well-designed benefit schemes can offer big advantages to employers and employees alike, something illustrated by the growth in their popularity over recent decades. They can help to engender loyalty among the workforce and motivate them to be more productive, and they can give employees more control and flexibility over their remuneration, enabling them to choose the options that work best for them.

However, the employee benefits landscape is changing significantly – especially when it comes to company cars. Reforms to salary sacrifice schemes, coupled with the recently announced Company Car Tax (CCT) rates, mean that there is more to consider than ever before.

To help, LeasePlan UK has outlined the different options available to businesses when providing a company car as an employee benefit:

1.   Traditional company car schemes

In traditional company car schemes, the company buys or leases cars itself for employees to use. The most common way that employers provide company cars for their employees is through Business Contract Hire. The company simply hires or leases the car from a leasing provider for a predetermined period and mileage at a fixed monthly cost. The leasing provider retains ownership of the car, along with all the associated risks and responsibilities. At the end of the agreed term, the company hands back the car and pays any end-of contract charges.

The benefits of this type of arrangement include low initial costs and fixed monthly payments that make budgeting easy. In addition, neither the employer nor the employee is exposed to the financial risks of car ownership, such as depreciation.

2.   Employee car ownership

An alternative way of providing a company car is through an Employee Car Ownership (ECO) scheme. Here, the employee pays a monthly fee to acquire their car, usually from a fleet provider and within a framework specified by their employer.

Usually, an ECO car is supplied via a Credit Sale Agreement, which transfers the title to the employee at the outset. Because ownership of the car passes to the employee, it’s not deemed to be a ‘company car’ for tax purposes and is therefore not subject to company car tax.

However, it’s important that the ECO scheme is structured correctly so as not to fall foul of legislation.

3.   Salary sacrifice

A salary sacrifice scheme is an arrangement whereby an employee gives up a portion of their salary in return for some form of employer-provided benefit, such as a car. It’s become increasingly popular in recent years and is an integral part of many flexible benefits packages offered by employers.

Typically, the salary sacrificed covers not only the financing of the car, but also maintenance and insurance. Employees can also benefit from their company’s corporate buying power to drive a new car at a much lower cost than if they were funding it privately.

The tax treatment of salary sacrifice schemes has changed recently but employees are still exempt from having to pay National Insurance contributions on the amount they sacrifice. The schemes work especially well if structured as a Green Car scheme – offering ultra-low emission cars.

4.   Cash allowance

This relates to the practice of giving employees a choice: a cash allowance in lieu, of a company car. This gives employees greater flexibility, however, care needs to be taken when structuring a cash allowance policy, to make sure it does not create too much uncertainty for the company and that it takes into account both current and future legislation. And, while employees may prefer the greater flexibility of cash allowance policies, employers will find it more difficult to ensure that their drivers have cars that are well maintained and appropriately insured.

A reported rise in the number of employers offering ‘cash for car’ to their employees was in part due to a limited choice of vehicles following the introduction of the WLTP emissions test, compounded by a lack of visibility from the Treasury on future Company Car Tax (CCT) rates. Whilst these ‘schemes’ can be emissions heavy – as providing cash can lead to employees driving older and often more polluting vehicles, they can also offer employees the opportunity to choose greener, more environmentally-friendly options.

5.   No ‘one-size-fits-all’

Both employers and employees will benefit more from some of these schemes than others. Many companies, recognising that there is no single ‘one-size-fits-all’ programme, will want to tailor the solutions they offer to meet the changing demands of employees and to offer maximum flexibility.

Such an approach has the advantage of offering more options that appeal to a wide range of prospective employees, with obvious advantages for recruitment and retention. They also indicate a concern for employee welfare, and account for the differing priorities of staff, whose needs are likely to vary. These are not merely limited to the nature of their transport needs, but frequently reflect differing generational priorities.

Finally, it’s important to take into consideration the type of vehicle you provide your employees with. For example, with the recent changes to CCT, certain company cars will pay no tax at all, following the announcement that zero-emission vehicles, along with hybrids that have an all-electric range of 130 miles, will have their taxes scrapped.

Drivers need to make informed choices, especially considering the evolution from traditional company car schemes and the fact that drivers often look purely at headline costs rather than at Whole Life Cost (WLC). These changes can be utilised to encourage your drivers to go green and are a step in the right direction to future-proofing your fleet.