Making Every Pound Count

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1 WORKFORCE & OD COMMITTEE 09 DECEMBER 2014 AGENDA ITEM 2.6 LEASE CAR SALARY SACRIFICE SCHEME Report of Director of Workforce and Organisational Development Paper prepared by Purpose of Paper Assistant Director of Workforce and Organisational Development - Operations To seek the approval of the Workforce and OD Committee for the implementation of a lease car salary sacrifice scheme for staff Action/Decision required To receive the report and support the thb s sign-up to the lease car salary sacrifice scheme Link to Doing Well, Doing Better: Standards for Health Services in Wales : Link to Health Board s Corporate Plan This paper supports Standard 25 Workforce Recruitment and Employment Practices Making Every Pound Count Acronyms and abbreviations NWSSP NHS Wales Shared Services Partnership CTC Child Tax Credits WTC Working Tax Credits Lease Car Salary Sacrifice Scheme Page 1 of 9 Workforce and OD Committee

2 LEASE CAR SALARY SACRIFICE SCHEME Introduction At meetings in March and August 2014, Executive Directors supported the principle of the teaching Health Board signing up to a lease car salary sacrifice scheme for staff. Approval of the scheme was agreed subject to clarification of PtHB s liability in respect of employees who entered into a salary sacrifice and who subsequently went on maternity leave; and also subject to the approval of the Workforce and OD Committee and the Local Partnership Forum. Over the past few years a number of tax efficient salary sacrifice schemes have been introduced throughout the NHS in Wales for the benefit of staff. These schemes have included childcare vouchers and bicycles. The purpose of this paper is to set out the proposals for introducing a new lease car scheme with effect from 1 st September 2014, which will enable employees to acquire a lease car and recover income tax, national insurance contributions and superannuation on the cost of it. The new Lease Car Salary Sacrifice Scheme proposed is available to a much larger proportion of the workforce than the existing lease car scheme as it is not restricted to business mileage users only. It is cost effective for both employer and employee and can be seen as an effective recruitment and retention tool. Agenda for Change section 17 sets out requirements for reducing carbon emissions. Through the provision of fuel efficient vehicles for staff that travel whilst undertaking their operational activities, rather than continuing to use their own vehicles which may be less fuel efficient, the aim is to significantly reduce the NHS carbon footprint. In addition, the condition of these grey fleet vehicles is not clearly known and whilst it is the employee s responsibility to ensure the vehicle is roadworthy, there is also a duty of care placed upon the employer in that respect. Therefore by introducing a new attractive lease car salary sacrifice scheme, not restricted to just business mileage users, it is hoped to encourage greater take up of lease cars by staff and a shift away from grey fleet usage, therefore saving Powys Teaching Health Board and it s employees money, mitigating the risk and reducing carbon emissions. Salary Sacrifice Scheme Salary Sacrifice is a tax efficient way of delivering staff benefits. Essentially, the employer provides some benefit or service in return for the employee giving up some of their Gross salary. A salary sacrifice scheme for lease cars is not only available to a larger proportion of the workforce, but also offers real and potentially substantial cash benefits to both the employee and the employer. Employees can sacrifice from their gross salary and save up to 40% in tax plus national insurance and pension contributions (the saving is higher to higher rate tax payers). There are also savings to the employer from reduced National Insurance and pension contributions. Because the employee sacrifices Gross salary it means the tax and pension Lease Car Salary Sacrifice Scheme Page 2 of 9 Workforce and OD Committee

3 contribution they usually pay is reduced as these charges depend on the amount the employee earns. In the case of this scheme, the use of salary sacrifice means that the car is technically given to the employee for nothing, therefore the car is treated as a company car and company car tax (Benefit in Kind) is payable by the employee. This is often substantially lower than the income tax that the employee would have paid. The exact savings will depend on individual circumstances and the car that is selected. The company car Benefit in Kind charge which is then subject to income tax is calculated on the manufacturer s list price of the company car and a % charge determined by the exhaust emissions of each specific car. The relevant % charges based on CO 2 emissions are as prescribed by HM Revenue & Customs. The general leasing period will be for three years and employees will be able to revert back to the higher salary (original) at the end of the leasing period. It is envisaged that for the majority of employees the arrangement will run its normal course through the life of the lease. An employee will be automatically opted out of the scheme where these arrangements mean that their rate of pay falls below the National Minimum Wage. This action ensures that an employee s right to a legal rate of pay is maintained. Employees who are unable to attend work due to sickness or incapacity, for a period exceeding 6 months, or who take maternity leave will have the following options: Option 1 To return the car and pay the early termination fee. (All costs associated with damage or excess mileage will be charged to the employee). Option 2 To continue paying for the car on a net salary deduction basis (or standing order) NHS Fleet Solutions recognised that there was an extension of the Sex Discrimination Act 2008, which states that an employee can not sacrifice Statutory Maternity Pay (SMP), and that an employer is unable to withdraw the benefit during this period. They have sought to mitigate this risk, by offering each client organisation the option to include an additional contingency in to the price of each car. At Northumbria Healthcare, they have built in an amount of 90 to every car ordered which acts as a contingency in case any employee makes a claim under this Act and stops paying for their car whilst they are receiving SMP. If no claims are made, this money is retained as additional income. Ultimately, if an employee made a claim under this Act, the employer would be required to cover the cost of the car during the period of SMP. To date, there have been no claims at Northumbria Healthcare where the scheme has been running for over 7 years, and NHS Fleet Solutions are not aware of any claims being made at other organisations. The Salary Sacrifice charge includes: Rental of the chosen car for the requested mileage All normal servicing/maintenance Lease Car Salary Sacrifice Scheme Page 3 of 9 Workforce and OD Committee

4 Road Tax Tyre replacement including accidental damage Breakdown cover Fully Comprehensive Insurance for any employee and up to 4 named drivers over the age of 21 24/7 accident management support Guaranteed courtesy car following an accident Provision for end of contract damage Employee Benefits Examples of the benefits to employees are illustrated in Appendix 1. Benefits to PtHB The Salary Sacrifice offers key benefits as below: Cash Savings Powys Teaching Health Board make a saving on each car leased. The saving can be a pre-determined amount, initially a figure of 600 per car, per annum. This strikes a balance between employee and employer benefit and has proven effective in terms of staff take-up in participating Health Organisations in England and Northern Ireland. No cost to Powys Teaching Health Board enables Powys Teaching Health Board to provide cars for our employees without incurring cost, as the fleet management charge is recovered via the payment from the employee s gross salary sacrifice. Administration the entire management of the scheme is carried out by the service provider, with minimal admin resource by Powys Teaching Health Board in order to maintain control mechanisms. Environmental provides tangible evidence of our commitment to the environment and the green agenda. We are able to improve our carbon footprint by providing employees with opportunity to move from driving older, used cars, to brand new cars with low CO2 emissions. Staff Benefit this scheme can be marketed as an attractive staff benefit and can be a useful tool in improving staff retention and morale. Duty of Care The scheme also answers Duty of Care obligations under the new Corporate Manslaughter Act introduced in If the demand levels at Powys Teaching Health Board reflect that of other organisations then the savings in the first twelve months could be between 30k - 50k (based on 3% - 5% workforce take-up), this however is only indicative at this stage and should be taken with caution. The costs of administering the scheme are minimal as NHS Wales Shared Services Partnership (NWSSP) in association with their partner NHS Fleet Solutions undertake all of the initial work involving quotations Lease Car Salary Sacrifice Scheme Page 4 of 9 Workforce and OD Committee

5 and orders and maintain a 24/7 hotline. This is to ensure that the quality and service provision is consistent, guaranteeing a direct point-of-contact and enabling a speedier application/order process. HR Implications Employees should be made aware that a reduction in taxable salary may affect other entitlements and state benefits such as Statutory Maternity Pay, sick pay and their level of entitlement in the event of death. A reduction in taxable salary might also affect more general matters such as mortgage applications, however the majority of high street lenders take into account such arrangements, as many banking institutions have similar arrangements in place for their own employees. It should be noted that an employee will not be permitted to reduce their taxable pay to a rate below the prescribed National Minimum Wage rate (that their new rate of taxable pay would equate to less than the hourly legal minimum rate). With regard to the NHS Pension scheme, there could be an adverse effect on pension entitlement for those nearing retirement, as it is the last years of income that is used to calculate pension benefits. There are also proposals to make some changes to the NHS Pension Scheme in future years which could have some impact on employees on cars taken out in future years. There could also be implications for employees claiming Working Tax Credits (WTC) and Child Tax Credit (CTC), as WTC is means tested and affects the CTC received. Any employees currently claiming these benefits will be advised to consider carefully the likely impact on their income. Recommended Supplier and Options NWSSP will administer the Lease Car Salary Sacrifice Scheme in association with NHS Fleet Solutions who are offering a fully managed lease car scheme which is pre-approved by HMRC for salary sacrifice purposes and which uses existing NHS contracts for cars (GPS). NHS Fleet Solutions are an NHS Organisation hosted by Northumbria Healthcare NHS Foundation Trust. The cars provided through the scheme are fully serviced and maintained, taxed, insured for up to 4 additional drivers and competitively priced. Extensive marketing material for the scheme will be provided. NWSSP will work together with NHS Fleet Solutions to determine the eligibility of the employee, provide confirmation of the vehicle order and provide minimal procurement and payroll assistance and help and support in all aspects of marketing and promoting the scheme. An example of a brochure produced for NWSSP is attached at Appendix2. In summary NWSSP / NHS Fleet will provide, Marketing of the scheme including on-site road shows All brochures, marketing and promotional literature Dedicated account management Regular special offers to enhance take up of the scheme Lease Car Salary Sacrifice Scheme Page 5 of 9 Workforce and OD Committee

6 On-going professional help and advice with regard to legislative changes ie VAT Procurement Requirements - NHS Fleet Solutions utilise the National GPS Procurement Framework contract for sourcing vehicles and the arrangement meets the Procurement governance requirements and there is no need for the NWSSP to undertake a separate procurement process. Supporting Local Business NHS Fleet Solutions have confirmed their agreement to utilise local vehicle dealerships to supply the lease vehicles (subject to the dealerships meeting the GPS terms and conditions and required levels of service) Eligibility and conditions There are a number of important factors to be determined prior to the introduction of a Lease Car Salary Sacrifice Scheme. The following conditions are proposed: Business mileage incurred will be reimbursed at the normal standard business mileage rate. The Scheme will only be open to permanent employees of Powys Teaching Health Board (employees on a contract that would more than cover the 3 year term will be reviewed on an individual basis) There will currently be a limit to one salary sacrifice lease car per employee (separate arrangements are being developed to increase this) No named driver under the age of 21 will be entitled to drive the car under current insurance arrangements. However separate insurance arrangements are being developed for named drivers under the age of 21. Conclusion The introduction of a Lease Car Salary Sacrifice scheme offers benefits for both the employee and the employer. It is further evidence of the teaching Health Board s commitment to introducing staff benefits, with the potential benefits and savings to individuals being considerable. Recommendation The Workforce and OD Committee are requested to: 1. Approve the implementation of the Lease Car Salary Sacrifice Scheme with effect from 1 st November Approve a review of the salary sacrifice scheme in 12 months to assess takeup, and benefits Lease Car Salary Sacrifice Scheme Page 6 of 9 Workforce and OD Committee

7 Report prepared by: David Long Assistant Director of Workforce and Organisational Development Presented By: Julie Rowles Director of Workforce and Organisational Development Background Papers [ Financial Consequences As determined by the report Other Resource Implications As determined by the report Consultees Lease Car Salary Sacrifice Scheme Page 7 of 9 Workforce and OD Committee

8 Appendix 1 Finance - Employees Benefits Example 1 Below is a simple example using a Ford Fiesta 1.25 Studio 3dr rate to demonstrate how salary sacrifice is calculated for an employee of say, having a current salary of 25,000 and they are a member of the NHS pension scheme. The employees will be required to make an annual salary sacrifice of 2, ( per month) but will save per month in NIC and Pension Contributions and Income tax. This means the actual monthly cost is around (this is the estimated reduction in take home pay). Combine this amount with the additional company car tax liability of per month and the overall total monthly net cost of the car is The example below includes the lease of the vehicle, road tax, fully comprehensive insurance, breakdown cover and all normal servicing and maintenance costs. s s Monthly Cost (salary sacrifice per month Less: Reduction in NIC (per month) (25.24) Reduction in Tax (per month) (43.34) Reduction in Superannuation (per month) (21.43) (90.01) Reduction in net salary (per month) Add Tax on benefit in kind (per month) Reduction in Monthly Take Home Pay Example 2 Below is a further example using an Audi A3 1.6 TDi SE 3dr rate to demonstrate how salary sacrifice is calculated for an employee of say, having a current salary of 25,000 and they are a member of the NHS pension scheme. The employees will be required to make an annual salary sacrifice of ( per month) but will save per month in NIC and Pension Contributions and Income tax. This means the actual monthly cost is around (this is the estimated reduction in take home pay). Combine this amount with the additional company car tax liability of per month and the overall total monthly net cost of the car is The example below includes the lease of the vehicle, road tax, fully comprehensive insurance, breakdown cover and all normal servicing and maintenance costs. Lease Car Salary Sacrifice Scheme Page 8 of 9 Workforce and OD Committee

9 s s Monthly Cost (salary sacrifice per month Less: Reduction in NIC (per month) (36.18) Reduction in Tax (per month) (62.13) Reduction in Superannuation (per month) (30.72) Total Reduction (per month) (129.03) Reduction in net salary (per month) Add:Tax on benefit in kind (per month) Reduction in Monthly Take Home Pay With regard to the NHS Pension scheme, there will be no impact unless the salary sacrifice runs into the period use to calculate the pension entitlement. The fact that the contractual pay is being reduced means that the level of pension contribution will be reduced thus resulting in an increase in the take home pay. The other circumstances where a salary sacrifice may impact on the ongoing pension entitlement is where a staff member is taken seriously ill and is required to take medical retirement or dies in service. In such circumstances, the pension entitlement is determined by the income level in the preceding 12 months and therefore may be impacted if a salary sacrifice is in place. It should be noted that national pension arrangements are being reviewed and any change would need to be taken into account in future years. Lease Car Salary Sacrifice Scheme Page 9 of 9 Workforce and OD Committee