Salary Sacrifice Car

This guide explores how the salary sacrifice for cars scheme works, its benefits and drawbacks, and whether it's right for you.

Salary sacrifice schemes have become a popular way for UK employees to enjoy benefits while saving on taxes. One such benefit is the salary sacrifice for cars, which allows employees to lease a car through their employer while reducing their taxable income. In this detailed article, we’ll explore what salary sacrifice for cars is, how it works, its benefits and drawbacks, and whether it is worth considering for your financial and personal needs.

What is Salary Sacrifice for Cars?

A salary sacrifice scheme is an arrangement between an employee and their employer where the employee agrees to give up a portion of their gross salary in exchange for a non-cash benefit. In the case of salary sacrifice for cars, the employee gives up part of their salary, and in return, they get a car lease deal provided through their employer. The scheme allows employees to access a car without having to take out a personal loan or enter a traditional car finance agreement.

The key advantage of a salary sacrifice arrangement is that the employee's taxable income is reduced, which means they pay less income tax and National Insurance contributions (NICs).

How Does Salary Sacrifice for Cars Work?

The process of salary sacrifice for cars typically works as follows:

  1. Agreement with Employer: The employee agrees to sacrifice a set portion of their salary in exchange for the use of a car. This amount is deducted from the employee's gross (pre-tax) salary.

  2. Car Lease: The employer arranges a car lease, usually for a set period of time (such as 3 or 4 years), through a leasing company. The cost of the lease, maintenance, insurance, and other related expenses can be included in the agreement.

  3. Tax Benefits: Since the salary sacrifice reduces the employee’s gross salary, their taxable income and NICs are lower, resulting in potential savings.

  4. Benefit-in-Kind (BiK) Tax: Employees must pay Benefit-in-Kind tax on the car they lease. The BiK rate is determined by the car’s CO2 emissions and the value of the vehicle.

Key Benefits of Salary Sacrifice for Cars

  1. Tax Savings: One of the most significant benefits of salary sacrifice for cars is the potential tax savings. By reducing your gross salary, you pay less income tax and NICs. In addition, if you opt for an ultra-low emission vehicle (ULEV), you may benefit from lower BiK tax rates.

  2. Convenience: Salary sacrifice car schemes often come with all-inclusive packages, which cover the cost of insurance, maintenance, servicing, road tax, and breakdown cover. This simplifies the process of owning a car, as all the related expenses are rolled into one monthly deduction from your salary.

  3. Access to New Cars: The scheme allows employees to drive brand-new cars without the upfront costs or credit checks typically required for traditional car financing. Leasing a new car can provide access to the latest models with improved fuel efficiency and safety features.

  4. Lower BiK for Electric Vehicles: The BiK tax on electric and ultra-low emission vehicles is significantly lower than that for traditional petrol or diesel cars. This makes salary sacrifice an appealing option for those looking to switch to greener vehicles.

  5. No Large Upfront Payment: Unlike traditional car finance or loans, you don’t need to pay a hefty deposit upfront. The cost of the car is spread over regular monthly payments through salary sacrifice.

Drawbacks of Salary Sacrifice for Cars

  1. Impact on Take-Home Pay: While salary sacrifice reduces your taxable income, it also reduces your overall gross pay, which could affect your ability to secure loans or mortgages based on your salary. You’ll need to carefully consider how the salary reduction will impact your monthly budget.

  2. Benefit-in-Kind Tax: Although you save on income tax and NICs, you will need to pay Benefit-in-Kind tax on the car. For petrol and diesel cars with higher emissions, this tax can be substantial and may reduce the overall savings.

  3. Impact on Pension Contributions: Since your salary is being reduced, your pension contributions (which are often a percentage of your salary) may also be lower. This could affect your long-term retirement savings unless your employer adjusts the contributions.

  4. National Minimum Wage: You cannot participate in a salary sacrifice scheme if the salary reduction would take you below the National Minimum Wage. Employers must ensure that employees' salaries remain above this threshold.

  5. Commitment Period: Salary sacrifice car schemes typically require a commitment period of several years. If your circumstances change and you need to exit the scheme early (for example, if you leave your job), you may face penalties or be required to pay off the remaining lease costs.

Is Salary Sacrifice for Cars Worth It?

Whether a salary sacrifice for cars is worth it depends on several factors:

  • Tax Bracket: Higher-rate taxpayers (earning over £50,270) stand to benefit more from salary sacrifice schemes, as they can save a greater percentage in tax.

  • Type of Car: Opting for an ultra-low emission vehicle (ULEV) or an electric vehicle can lead to significant savings on BiK tax. However, leasing a higher-emission vehicle may reduce your overall savings.

  • Employer's Offer: Not all employers offer the same salary sacrifice schemes. The specific terms of the car lease and the range of cars available can vary, so it’s essential to check what your employer provides.

  • Personal Financial Situation: If you have a stable job and can comfortably afford the reduced take-home pay, salary sacrifice for cars could be an excellent way to access a new car while saving on taxes. However, if you anticipate any changes in your financial situation or job stability, the long-term commitment may be a risk.

Conclusion

Salary sacrifice for cars can offer significant tax savings and convenience, particularly for higher-rate taxpayers and those considering ultra-low emission vehicles. However, it’s crucial to weigh the benefits against the potential downsides, such as reduced pension contributions and the impact on your take-home pay. Always review your financial situation, tax implications, and the terms of your employer’s scheme before deciding whether a salary sacrifice car lease is the right choice for you.

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