If you’re looking for a new car, getting a salary sacrifice car through your employer can be highly cost-effective way of doing so. The lease payment is taken out of your salary before tax so, as an added bonus, you pay less income tax and lower national insurance contributions.
Not all employers operate salary sacrifice schemes but benefits available from those that do can include childcare vouchers, pension scheme contributions and bikes, as well as cars.
Electric cars are proving to be particularly popular on salary sacrifice schemes. Mike Potter, CEO of EV leasing specialist DriveElectric, commented: ‘The high cost of fuel coupled with the introduction of low emissions zones across the country has resulted in increased demand for electric vehicles. One cost-effective way to get an electric car is through a salary sacrifice scheme with your employer. With benefit-in-kind tax, you can buy an electric car for a cheaper price when choosing salary sacrifice.’
While you can save money by leasing a new car via salary sacrifice, there are a number of factors that you must consider to make sure it is right for you.
What is a salary sacrifice car?
A salary sacrifice car scheme allows you yo lease from a third-party supplier that has partnered with your employer. The cost of the car is deducted from your salary each month before you are taxed. Unlike company car schemes, where the company pays for the car, in salary sacrifice arrangements you pay for the car and it is your responsibility.
It’s important to clarify that a salary sacrifice car is still eligible for company car tax, known as benefit-in-kind (BIK). This is an additional tax that is charged monthly and based on the value of the car, its CO2 emissions and your personal income tax bracket.
Electric car salary sacrifice scheme
Electric cars salary sacrifice schemes can be the most cost-effective. That’s because you have to pay BIK tax on any company car out of your net pay, after salary sacrifice deductions, and EVs attract a much lower rate.
In the 2023-24 tax year, you pay just 2% BIK on any EV. By contrast, BIK on a plug-in hybrid is at least 5%, while it’s over 20% on petrol and diesel cars. Those percentages will increase over the coming years, as well.
Is salary sacrifice worth it for a car?
The main benefit of salary sacrifice is you are able to obtain a brand-new car, which you might not otherwise be able to afford, for an all-inclusive monthly fee. New cars are generally more reliable, safer and cheaper to run. You also get a manufacturer warranty, plus support from the vehicle’s provider in the event that something goes wrong.
Most agreements include VED (Vehicle Excise Duty), insurance, roadside assistance and maintenance – be sure to check with your employer. If so, the only day-to-day running cost that you have to pay directly out of your own pocket is fuel – or the cost of charging, if you get an electric car.
If you choose the right car (read on to find out how), the costs can be lower than if you were to fund the car yourself. Unlike a personal leasing contract or PCP finance, there is no initial payment or deposit to pay so you can get the car straight away.
Are there any downsides to salary sacrifice?
In short, yes. Because of the BIK tax penalty, the cost of obtaining a car that has higher CO2 emissions like a sports car, SUV or hot hatch can be higher than funding one yourself.
Once you agree to a salary sacrifice you are locked in for the duration of the contract, unless you leave your job – at which point you’ll have to give the car back. Because the cost of the car is taken from your salary, there is no flexibility if you can’t afford to make the payment.
Your net salary will also be lower, which could affect your ability to get mortgages, loans or other forms of finance. Also, as the car is leased you will have to give it back at the end of the contract and you’ll either need to start a new salary sacrifice agreement or fund a new car with an alternative method.
How much will a salary sacrifice car save me?
It entirely depends what scheme your employer operates. Once you have access to the list of vehicles available, lease rates and included benefits, you can start to work out what it will cost you each month and how much you may be able to save. Don’t forget to include the cost of BIK tax for the duration of the contract, as the current rates increase periodically.
You also need to calculate how much you would spend on insurance, VED, servicing, MoT tests and other associated costs if you were to fund a car yourself. Make sure the company that operates your employer’s scheme provides you with an accurate overview of the anticipated costs before you decide to go ahead.
