Accounting for car salary sacrifice arrangement

Advice on the double entry when accounting for car salary sacrifice

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Hi, we currently post this to the employee loan account for the amount of the salary sacrifice. There is an offset to this which is the amount paid to the electric car company, but there is a difference between the two due to the NI savings (salary sacrifice value is less than the amount paid to the car company) I am not sure where I put this difference, any advice would be appreciated.

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By FactChecker
10th Jan 2024 00:48

I don't do bookkeeping, but "we currently post this to the employee loan account for the amount of the salary sacrifice"?

1. There isn't an 'amount of salary sacrifice' ... the salary has been contractually reduced so there is no such amount to post anywhere;
2. Whilst I've no idea what you mean by 'the employee loan account' (do you mean DLA?), what aspect of the arrangement makes you think there's *any* type of loan here?

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Replying to FactChecker:
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By Mr_awol
10th Jan 2024 09:01

FactChecker wrote:

1. There isn't an 'amount of salary sacrifice' ... the salary has been contractually reduced so there is no such amount to post anywhere;


a) isnt there?
b) has it?

I have just looked at a few salary sacrifice agreements and they are all either a separate letter of variation to or addendum to the contract setting out how the employee will accept a reduction in, or forgo a portion of, their salary - in return for a company car. It is different to a contract including company car on top of salary, and i believe they tend to reference the 'true' gross salary which will be used for percentage-based pay reviews and/or pension purposes (to ensure that the employee doesn't lose out because of the car option taken).

In that case, with a true salary sacrifice arrangement (not company car scheme) i would say it is correct to show the gross employment cost in wages and not to have a vehicle leasing charge in the accounts (albeit the commitment will be disclosed). This is on the basis that the employee is still being paid, and is entitled to, the 'full' salary, they are just choosing to receive some of it in another way in order to mitigate their tax liability and it would be misrepresentative to move some employment costs to MRE. The Employers NIC saving may make that a bit more complicated, especially if it has been shared with (or entirely deducted from) the amount sacrificed

Others may disagree and TBH i wouldn't necessarily object to accounting for the cost in the accounts as MRE instead- as long as it stayed in the same category and didn't move from COS to admin, for example.

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Replying to Mr_awol:
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By michelle_l_Ldn
10th Jan 2024 10:14

Hi,

Thank you for your reply which is very helpful. We have been booking the gross employment cost(before the salary sac) to salaries (Debit P&L) then we need to book a credit for the Salary sacrifice amount where would you post this in the accounts? A separate P&L account? Historically this is going to employee loans which I don’t think is right.

We then have the payable to the car scheme provider Cr payables where would this offset be booked to the same P&L account as per above entry?

It does get a little more complicated due to the NI savings.

Thanks

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Replying to Mr_awol:
John Toon
By John Toon
10th Jan 2024 11:09

Personally, I'd account for the reduced salary and the lease as separate costs, but I could live with the counter argument and have the lease cost included as part of salary costs. I suspect this may complicate disclosures in accounts (depending on standard applied) - you'd need a lease commitment note, possibly lease costs (in operating profit note), plus remuneration note (which probably would exclude the lease costs).

My reasoning for the above preference is purely a practical one. Contractually salaries have reduced so the P&L should reflect it and the business has a lease cost in addition as a result of the agreement. If an employee left, but the lease couldn't be ceased at the same time the cost would still be incurred and unless the vehicle could be reassigned it wouldn't remain an employment cost.

As an alternative, if a company chooses to offer salary sacrifice for pension contributions you wouldn't continue to disclose employee pension contributions once the employer took them over under the agreement. I apply the same logic to any other sacrifice arrangement.

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Replying to Mr_awol:
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By FactChecker
10th Jan 2024 11:57

I've no doubt you can find examples of Salary Sacrifice agreements written and implemented in the manner you describe ... but that doesn't make them valid if they are put under the microscope (by HMRC or anyone else) - so may lose all the intended tax/ni savings.

"This is on the basis that the employee is still being paid, and is entitled to, the 'full' salary, they are just choosing to receive some of it in another way in order to mitigate their tax liability and it would be misrepresentative to move some employment costs to MRE"
... encapsulates what is wrong in the foundational thinking of your approach.
The employee is NOT entitled to the 'full' salary in any legal sense - if they are, then a SalSac agreement is NOT in operation.

My reference to 'legal' is a slightly clumsy way of pointing out the difference between the impact on those components of pay that are statutory and on those that are within the remit of the employer to negotiate as seen fit by them.

For instance: the contractually reduced salary MUST be used when determining entitlement (or lack of it) to Maternity, Redundancy and all other forms of statutory pay (AND the amount of it);
whereas the employer *may* choose to change certain terms in the employment contract (such as those relating to overtime) such that they are based on a 'notional salary' (which may happen to be the same as the pre-SalSac salary).
[But that 'notional salary' has no statutory existence ... which is why it is possible to breach NMW by agreeing a Salary Sacrifice for a worker already close to the limit.]

EDIT: although this is a subject on which vast reams of explanation can be written, I see that John has made another excellent point above - regarding the situation "If an employee left .."

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By Ruddles
10th Jan 2024 12:56

I am in the camp that would show what the employee is contractually being paid as salary. I don't see that an employee that has agreed to reduce his salary from £x to £y, and who is then provided with a company car, should be treated differently from any other employee whose contract says that they will be paid £y plus a car.

What if the company owns the car - would it be correct to account for the 'gross' salary and reflect no depreciation in the accounts? I think not.

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By Bobbo
10th Jan 2024 14:37

Agree with others, I would be posting the reduced (post sacrifice) salary as for the payroll journal then the vehicle lease costs would be going to an appropriately named code.

For reporting purposes possibly (i.e depending on materiality, whether anyone cared etc) would then classify the lease costs as 'other employee benefits' or similar within a staff costs disclosure.

IMO posting the 'pre-sacrifice' salary to wages and offsetting the vehicle lease costs against the 'deduction' is simply incorrect.

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By FCExtraordinaire
11th Jan 2024 15:35

From what you are doing/saying, you would post this credit to the profit and loss to a separate code if you wish, therefore reducing the gross and or NI.
This is the same as booking the salary that he is actually getting. The car lease should not be "mixed up" with the salary journals..

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John Hextall
By John Hextall
16th Jan 2024 13:10

The point of salary sacrifice is that the employee agrees to take a reduced salary in return for the company paying for some benefit or other. So, if you are employed on a salary of 40k, for example, you might agree to reduce this by 2k for a pension and 3k for a car and your salary would then become 35k. The company would pay the other amounts over to the pension scheme and car lease. You might want to include these figures as part of the costs of employment in the published accounts, but it is wrong to mess up the payroll figures with 'ghost' salaries, loans and NI savings. The complication comes if you review salaries at the end of the year. Do you use 35k or 40k as the starting point?

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