Guide to car salary sacrifice scheme

  • The pros and cons of salary sacrifice
  • Savings to be made
  • No tax on electric cars

Hyundai Kona electric moving

Many employers offer additional benefits by way of salary sacrifice schemes. These enable you to pay for a range of different products from your salary before tax is deducted. As a result, you pay less income tax and national insurance contributions because your taxable salary is lower.

Benefits can include childcare vouchers, pension scheme contributions, bikes, and even cars. 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 is a car you 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 tax bracket.

Electric car salary sacrifice scheme

2019 Tesla Model 3 rear

As announced in the 2020 budget, electric cars are the most beneficial to obtain via a salary sacrifice because they attract no BIK in the 2020/21 tax year. This means the only cost to you will be the salary deduction, based on the monthly lease cost of the vehicle.

Plug-in hybrids are similarly appealing, with much lower BIK rates than petrol or diesel models.

What are the benefits of salary sacrifice?

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 (be sure to check with your company's supplier first) include VED (Vehicle Excise Duty), insurance, roadside assistance and maintenance – meaning you shouldn't have any other costs to pay apart from fuel.

If you choose the right car (read on to find out how), the running costs can be lower than if you were to fund the car yourself. Unlike a personal leasing contract or PCP, 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 penalty, the cost of obtaining a car that has higher CO2 emissions (things like sports cars, SUVs and hot hatches) can be higher than funding one yourself.

For cars with lower emissions, where the BIK is less than the tax you would have paid if you didn't have the car at all, the Government will still charge you the higher tax rate of the two – unless the car emits less than 75g/km.

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 do I know if a salary sacrifice car is right for me?

First you need to understand the scheme that your employer operates. You should be able to find out more about your company's scheme from its HR department. 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.

You need to account for the BIK cost (if applicable) for the duration of the contract, as the current rates increase each year. It's also worth pointing out that the 0% rate for electric vehicles only applies this year, from April 2021 it climbs to 1% and 2% the year after.

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.

Further reading:

>> BIK changes for plug-in hybrid, and electric cars

>> The cars that cost £20 to tax

>> How does car leasing work?

>> Best electric cars to lease