Salary Sacrifice and Car Allowance: How best to help your employees
One of the best ways to attract and retain talent is to offer a car scheme. In recent years, car allowances have become a more popular option than company leased vehicles, due to the reduced administration and risk to the business. Whilst this is brilliant for the business, often, the employee is left short as they will be (sometimes heavily) taxed on their car allowance.
Combining salary sacrifice and a car allowance, allows employees to maximise their allowance by using it before taxation. In this blog, we aim to understand the intricacies of both salary sacrifice and car allowances, exploring how they work and how they can be used together.
Understanding electric car salary sacrifice
Salary sacrifice, often referred to as a 'salary exchange', is a financial arrangement where an employee agrees to give up part of their pre-tax salary in exchange for a non-cash benefit – in this case, an electric vehicle. Electric car salary sacrifice schemes are gaining popularity because it is a cost-effective way for employees to drive a new EV while also reducing their income tax and National Insurance contributions.
How does salary sacrifice work?
The process of electric car salary sacrifice is straightforward. An employee selects an electric vehicle within a set budget, and the employer leases the car on their behalf. The lease cost is then deducted from the employee's gross salary, lowering their taxable income. This arrangement can lead to significant savings for both the employee and employer, as it reduces the amount of tax and National Insurance that needs to be paid.
This is appealing because of the low Benefit-in-kind (BiK) tax rates for electric vehicles. This means employees can enjoy driving a new EV at a reduced overall cost compared to traditional car leases or purchases.
At The Electric Car Scheme, we make electric car salary sacrifice a no-brainer for companies, which is why the scheme is at no cost to the employer to set up and run. As an employer, you are protected if the car needs to be returned early, and most importantly, you can run the scheme with no hassle, simple setup, straightforward reporting, and 5-star customer service.
What is a car allowance and how does it work?
A car allowance is a sum of money provided to employees by their employer to be used towards the cost of purchasing or leasing a vehicle. The employer covers the cost of using the vehicle for work-related purposes. Unlike salary sacrifice, a car allowance is added to the employee's salary and is subject to income tax and National Insurance contributions.
The flexibility of car allowances
Car allowances offer employees the flexibility to choose their vehicle and negotiate the terms of their lease or purchase. This can be particularly beneficial for those who prefer a specific make or model that may not be available through a salary sacrifice scheme. Additionally, a car allowance can be used for other vehicle-related expenses, such as insurance, maintenance, and fuel.
What is covered with a car allowance?
Car allowances typically cover the expenses associated with maintaining and operating a vehicle, such as fuel, insurance and necessary repairs. It should also cover a reasonable amount to compensate the employee for the ‘wear and tear’ on their vehicle resulting from business travel.
Comparing the benefits: Salary Sacrifice and Car Allowances
When weighing the pros and cons of salary sacrifice and car allowances, several factors come into play. Here’s a comparison of the benefits each option offers:
Salary sacrifice benefits
Tax Efficiency: Salary sacrifice reduces the employee's taxable income, leading to savings on income tax and National Insurance.
Simplicity: Salary sacrifice schemes mean that the scheme provider and employer take most of the hassle out of leasing a car.
No individual credit checks: As the employer is leasing the vehicle, the employee is not subject to a check on their finance.
Inclusive Packages: Many salary sacrifice schemes include insurance, maintenance, and breakdown cover, simplifying the process for employees
Car allowance benefits
Flexibility: Employees have the freedom to choose any vehicle and are not limited to a specific selection.
Control Over Costs: With a car allowance, employees can shop around for the best deals and manage their vehicle-related expenses.
Additional Income: The allowance is added to the employee's salary, which can be advantageous for those who already own a vehicle or have lower transportation costs.
Potential drawbacks to consider: Salary Sacrifice and Car Allowances
While both options have their merits, there are potential drawbacks that businesses and employees should consider:
Salary sacrifice drawbacks
Contractual Commitment: Employees are typically locked into a lease contract for a set period, which may not suit everyone.
Impact on Other Benefits: The reduced gross salary could affect mortgage applications and other benefits calculated based on income. It is important to note that this is the case for all car leases.
Car allowance drawbacks
Tax Implications: Since the allowance is taxable, the net benefit might be less than initially perceived.
Administrative Burden: Employees are responsible for managing all aspects of vehicle ownership, which can be time-consuming.
Making the right choice for your business and employees
Introducing an EV salary sacrifice scheme to your business means that employees can benefit from significant tax savings. Those employees who have a car allowance already will benefit from being able to use their whole car allowance pre-tax, which will increase the ‘usable’ amount by 30-60%.
For businesses looking to promote sustainability and offer cost-effective benefits, an electric car salary sacrifice scheme is the ideal solution, It can be run alongside a car allowance scheme, and also help employees who just want to sacrifice some of their salary to get the tax benefit too.
As the market for electric vehicles continues to grow, understanding and implementing the benefits of salary sacrifice is becoming increasingly important for businesses aiming to stay competitive and forward-thinking in their approach to employee benefits and talent acquisition.
Electric Car Salary Sacrifice and The Electric Car Scheme
Every company in the UK can help their employees on their journey to net zero by offering The Electric Car Scheme as an employee benefit. Salary sacrifice allows employees to save up to 60% when leasing any electric car of their choice; they simply agree to have a portion of their pre-tax salary deducted each month to cover the cost. As an employee you choose the car you want, add on any extras and drive away saving thousands! This enables employees to save on the upfront cost of electric cars since leasing involves no initial expenses. Consequently, more individuals can afford to drive electric vehicles, as the price is no longer a barrier impeding accessibility.
Save up to 60% on any electric car with salary sacrifice - because you pay before tax! The Electric Car Scheme will help you make the most of government incentives.
We have hundreds of cars to choose from, all you have to do is visit our quote tool and have a browse! The quote tool shows the breakdown of your savings and how much the car will cost every month. You can also add different specifications and customise your model to make it yours. We have included examples of three very different cars, all available at The Electric Car Scheme right now!
The Electric Car Scheme Limited provides services for the administration of your salary sacrifice employee benefits. The Electric Car Scheme Holdings Limited is a member of the BVRLA (10608), is authorised and regulated by the FCA under FRN 968270, is an Appointed Representative of Marshall Management Services Ltd under FRN 667174, and is a credit broker and not a lender or insurance provider.
