Salary sacrifice: early termination explained
Salary sacrifice schemes for cars are an excellent benefit for employees and can help employers to attract and retain talent. And with savings of 30-60% it seems like a no brainer, right? But what do you do when the unexpected happens and the employee leaves, goes on maternity leave or is made redundant during a scheme? Now it starts to get a little complicated… or does it?
Continue reading to find out about early termination fees and why elmo’s salary sacrifice scheme comes out on top.
- Most car leasing salary sacrifice schemes require employees or their employers to pay an early termination fee, should the employee leave or need to terminate the contract before the end date
- On elmo, there’s just a 60-day minimum term, for peace-of-mind in unexpected circumstances
- Some salary sacrifice leasing companies do offer Early Termination Protection, at an additional cost
What is an early termination fee?
With most leasing salary sacrifice schemes; an early termination fee is payable if an employer needs to end their agreement early. This could be due to absences such as long-term sickness, redundancies, parental leave or simply resignation. This is because most leasing deals are anywhere between 1 and 5 year periods – so the leasing companies want to recoup their costs.
It is a real consideration for employees and employers to avoid being lumped with a big bill.
The amount you’ll pay depends on the company offering the scheme and how soon the agreement is terminated. So, it’s important that both the employer and the employee understand what is expected of them, before signing on the dotted line!
Typically, early termination fees are a few months’ worth of payments, decreasing the further into the contract you are, a one off fee, or they could be a percentage of the remaining balance.
Terminated within Year 1 –> 5 months’ payment
Terminated within Year 2 -> 3 months’ payment
Terminated within Year 3 -> 1 months’ payment
Every company is different though, so check your contract to find out exactly what you are liable for.
Why is it different with elmo?
With elmo, things are a little different. If you take out a salary sacrifice scheme with us on elmoFlex, there’s just a 60-day minimum term. Therefore if an employee leaves, there won’t be an unexpected bill from us for the employee to pay, or to be covered by the employer.*
To terminate with us, simply give 30 days’ notice in line with the minimum term. Or, if the employer prefers, we can switch the subscription over to a new employer. The choice is yours!
This is just one of the many benefits of taking out a subscriptions-based salary sacrifice scheme vs car leasing.
* Please note, HMRC stipulates a 12-month minimum term for salary sacrifice, so the employee may be liable to pay back the tax benefit to them, should they decide to terminate early without leaving the company.
Early termination protection
Some salary sacrifice schemes do however offer Early Termination Protection for peace-of-mind for the employer and employee. It’s important to consider if this is right for you before signing any contracts – as we know, circumstances can change!
Usually, an additional fee is incurred by taking out this protection which ranges depending on how much the scheme is ‘worth’.
This protection takes many forms, but can include:
No exit penalties with premium protection
Depending on how far you are into your contract, some companies won’t charge a fee if you take out their premium protection. But this can cost you, up to 5% of the costs on average.
Transferring the scheme to a new company
Some companies offer the ability for employees to take their lease with them to their new company, at no extra cost (depending on how far they are into the lease).
A one off fee
This could be just one month’s payment, or another pre-agreed fee should the employee need to terminate the scheme early.
Transferring the scheme to a new employee, within the existing company
Some offer the chance to transfer the scheme across to a new employee, within the current company.
All of these types of protection can help to ease pressure on the employee, knowing that should their circumstances change, their salary sacrifice scheme remains flexible too.
So there you have it
When it comes to choosing a salary sacrifice scheme it’s important to consider your liability and make sure that it will work for both the employer and the employee. More comprehensive protection, may result in a higher monthly fee, but may be worthwhile in the longer term.
Alternatively, by taking out a subscriptions-based scheme with elmo, your risk is minimised with just a 60-day minimum contract.
Read more about our salary sacrifice scheme for electric cars over on our main page.
Learn more about BiK tax and what it means if you take out an electric car on salary sacrifice
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