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Guide to salary sacrifice

  • We take a look at one of the newest ways to get a company car
  • The benefits and possible savings explained
  • Find out why salary sacrifice is good for the company too

Written by Debbie Wood Published: 19 August 2013 Updated: 19 August 2013

Salary sacrifice is a term used for all sorts of different products we can buy before tax and national insurance, from childcare vouchers to pension contributions and healthcare.

Car salary sacrifice schemes have seen a rise in popularity in recent years as they provide a tax-efficient way for organisations to offer all their employees a brand new car at a cost lower than they are likely to get if they were buying direct from a forecourt.

In this guide we will be looking at company car salary sacrifice schemes in a little more detail and at what the core benefits are for you.

What is Salary Sacrifice?

In a nutshell, a salary sacrifice car scheme is a legally binding agreement where an employee gives up part of their gross salary in exchange for a car.

Unlike company car schemes where the company pays for the car, in salary sacrifice, the employee pays the monthly charge over an agreed term. The amount paid will depend on how expensive the car is and if it is fully maintained.

BIK tax, like company cars, is still applicable, so selecting a car with low CO2 emissions will produce the greatest savings.

The benefits for you

First and foremost, salary sacrifice gives you a brand new car that some of us wouldn’t have been able to afford if we were buying ourselves.

New cars are less likely to break down, will in most cases be fully maintained and usually cost less to tax because newer cars are generally more environmentally friendly.

The monthly cost of the car is deducted before tax and NI contributions, so the amount you pay in income tax and insurance goes down. 

Dependant on the company contract in place, the car may also come fully maintained or come with extra equipment as part of a wider deal with your company which could bring further savings.

Cars today are generally more fuel-efficient than older cars so there is also the potential to save in fuel costs.

The company perspective

A salary sacrifice scheme should cost a company virtually nothing to introduce and there are lots of benefits.

First of all, it is very important that a company is proactive in ensuring your safety when you are on the roads, especially if you are travelling for work. A car that is new, fully maintained and with the latest safety technology included, is in most cases, safer than your own car at home.

By getting  employees into newer cars the company is also reducing its carbon footprint which in turn is good PR and helps the company stay ahead of legislation.

Salary sacrifice schemes could also be viewed as a useful employee retention and engagement tool as employees need to commit to pay for a car through the company.

So why isn’t every company running a salary sacrifice scheme I hear you ask?

There are a number of reasons;

If employees don’t tend to leave the office in the first place there would be little incentive for companies to run a scheme like this.

Salary sacrifice schemes carry an element of risk for companies such as early termination and maternity leave costs. If you were to leave then the company could be left footing the bill for the car.

There is also the risk of tax rules changing which could make the scheme far more expensive to run.

One of the biggest problems for companies is getting employees to buy in to the scheme which requires time and money for marketing and communication campaigns to highlight the benefits.

Things to consider

You need to make sure that, if you decide to buy a car through the company, you can afford it. You will not be able to negotiate or miss payments when you sign the contract as it is taken direct from your salary before it reaches your bank account.

Despite paying a fixed cost every month, it is not your car and you will need to hand the keys back at the end of the term. In your contract it will state who will have to pay for any damage at the end of the contract so you could be left with a substantial bill if you don’t look after the car properly.  

Some companies will restrict choice for the cars that can be chosen because of the discounts and relationships in place with manufacturers or the CO2 emissions some cars produce may be too high. This could mean the car you had your eye on is not available through the scheme.

At the start of the contract you will need to state how much mileage you expect to travel, similar to an insurance policy, if this mileage is exceeded you are likely to be charged.