This article covers how the following can impact employees:
- BIK
- Statutory payments
- Entitlements
- Contribution-based benefits and earnings-related benefits
- Other employee benefits
BIK for electric cars
According to HMRC, employees receive a benefit-in-kind (“BIK”) when they obtain a car through a salary sacrifice scheme. HMRC imposes an additional tax on the BIK received by that employee, and the BIK rate is currently set at 2% of the P11D value of the car until the ‘24/’25 tax year, and will then increase by 1% annually until the ‘27/’28 tax year (per the annual Finance Act).
Any tax estimates provided by The Electric Car Scheme for after 5 April 2028 are estimates only.
Statutory payments
Salary sacrifice may affect other statutory payments received by an employee (e.g. Statutory Sick Pay (SSP), Statutory Maternity Pay (SMP) and Adoption Pay) because an employee’s recent earnings are used to calculate their statutory payments.
If an employee is entitled to statutory payments, the employee’s average weekly earnings may need to be used to work out the amount they are entitled to. To calculate an employee’s average weekly earnings, use the employee’s remuneration package (from the Salary Sacrifice Agreement) with its reduced cash element and not the notional salary that previously applied.
Entitlements
Importantly, salary sacrifice should not affect an employee’s entitlement to any enhanced company policies (incl. non-statutory ‘top-up’ payments to an employee to compensate for any reduction in their statutory pay entitlement).
For more information about the impact of salary sacrifice on statutory pay, please see: HMRC: Statutory Pay and HMRC: Time off
Contribution-based benefits and earnings-related benefits
An employee’s entitlement to contribution-based benefits (e.g. tax credits) is typically directly related to the amount of National Insurance they have paid or are deemed to have paid.
If an employee is not in a ‘contracted out’ pension arrangement, they may see a slight reduction in the second state pension (or ‘SERPS’) as this is based upon National Insurance contributions. A pension advisor will be able to advise the company and/or the employee on whether the pension is contracted in or out. The company will also reduce its National Insurance payments by taking part in a salary sacrifice arrangement.
For more information about the impact of salary sacrifice on tax, please see: HMRC: Salary sacrifice for employers and Salary sacrifice and your pension. The HMRC website also provides a tax credit calculator-HMRC: Tax credit or alternatively you can call the HMRC tax credits helpline on 0845 3003 900.
Other employee benefits
Salary sacrifice is not intended to negatively impact other employee benefits provided by the company (e.g. pension contributions, private health).
Typically, an employee’s notional salary (i.e. salary before salary sacrifice) will remain the reference point for other benefits that are calculated based on an employee’s salary. As such, these benefits should remain unchanged by an employee’s participation in the scheme (given that an employee’s notional salary remains the same). Similarly, future salary reviews should not be impacted by an employee participating in the scheme.
It is worth noting that if an employee is participating in the scheme and considering applying for a mortgage, they should confirm that their notional salary can be used for the mortgage.
For more information about the impact of salary sacrifice on statutory pay, please see: HMRC: Statutory Pay and HMRC: Time Off