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Salary sacrifice is an agreement between an employer and an employee where the employee exchanges part of their pre-tax salary for a benefit. It’s become a popular way to boost pension contributions, buy a bike, save on childcare, and even lease a car (petrol, diesel, electric or a hybrid vehicle). A great example of their popularity is that 70% of pension schemes now use salary sacrifice as the default contribution method. Since the benefit is non-taxable, it helps reduce income tax and National Insurance contributions, making it an attractive option for many.

In this blog, we’ll explore why you might use salary sacrifice for a car lease. We’ll cover the benefits for both employees and employers, as well as potential downsides - helping you decide if salary sacrifice for car leasing is the right option for you.

Car Leasing and Salary Sacrifice

Leasing a car through salary sacrifice allows employees to drive a car by paying for the benefit from their salary before tax. This means they can save on income tax and National Insurance contributions. However, employees will need to pay a small amount of Benefit-in-Kind (BiK) tax, also known as company car tax. The amount of BiK you pay is based on the vehicle’s CO2 emissions, P11D value (which includes the list price, VAT, and delivery charges), and the employee’s tax bracket.

Employees will then choose how many miles they expect to drive annually, how long they would like to lease the car for, and how they’d like to structure payments (whether through an accelerated or flat payment profile).

MG4 electric car with cost breakdown. Orange hatchback shown with green decorative elements. Table lists monthly costs including gross cost of £409 and net cost of £271. — For a 3-year lease period with 10,000 miles per year on a flat payment profile, the monthly gross cost of leasing an electric MG4 is £409. However, with salary sacrifice, you’ll save £164 in income tax and £8 in National Insurance. You will need to pay a small amount in BiK tax, which comes to £34. Without salary sacrifice, the cost remains £409 per month, but with salary sacrifice, you’ll only pay £271.

Benefits of Salary Sacrificing a Lease Car

Salary sacrificing a lease car offers benefits for both employees and employers. Let’s take a closer look.

Employee Benefits

There are several reasons why employees might choose to salary sacrifice for their car lease. Some of the key benefits include:

Easy Access to New Cars

Leasing allows staff members to drive a new car without having to pay for one upfront or finance it. When the lease period ends, they can choose another new car, making it a great option for those who enjoy regularly driving the latest models.

Lower Monthly Payments

By salary sacrificing the cost of the car lease, the monthly payment comes out of the gross salary. This means employees can save on both National Insurance and income tax, which lowers their monthly payments.

Everything Can be Bundled Into One Monthly Payment

With salary sacrifice, the employee can choose to include insurance, maintenance, breakdown cover and a home charge point (if you choose an EV) in their monthly payment. These add-ons also benefit from tax savings.

Makes Getting Into an Electric Vehicle More Accessible

Many people find switching to an electric car challenging because of the high upfront costs. However, salary sacrifice makes it more affordable by offering significant tax savings. The BiK tax on electric vehicles is currently low because they produce zero emissions, which helps reduce company car tax. This makes leasing an electric car more appealing, especially since the high upfront cost often deters people from switching.

Although the upfront cost of an EV may be higher than petrol or diesel alternatives, the running costs are significantly lower, as electricity is much cheaper than fuel.

No Individual Credit Checks Are Needed

Employees will not have to pass an individual credit check for electric car salary sacrifice. This is because all salary sacrifice leases are business leases instead of personal contract hires - meaning the company or employer is technically leasing the vehicle on the employee’s behalf.

Benefits For The Employer

Minimal Financial Risk

Since the car is funded by the employee’s income, there’s little financial risk for the employer. If the employee resigns, the car is (in many cases) returned to the leasing company, leaving the employer without liability. At The Electric Car Scheme, we offer Complete Risk Protection which protects the employer from day one.

Boost Employee Satisfaction

Offering a salary sacrifice car scheme is a valuable benefit that can positively impact the employees’ day-to-day lives. It’s an effective way to make employees feel valued while also helping to attract new talent to your company.

Support Environmental Goals

Introducing a salary sacrifice scheme for electric vehicles specifically is a great way to demonstrate your commitment to Environmental, Social, and Governance (ESG) goals. It shows employees that sustainability matters to you, just as it does to them.

Potential Drawbacks of Leasing a Car Through Salary Sacrifice

A silver electric SUV parked near a construction site with scaffolding and a café in the background, showcasing sustainable urban commuting options in a modern city environment.

Not all companies are best equipped to offer a salary sacrifice car scheme, and it’s important to understand when it may not be the right fit. Some businesses are better off opting for a business lease as opposed to salary sacrifice for example. For employees, committing to a two to three-year lease period can also be a big decision, that may not be best suited for everyone.

Here are some reasons why a salary sacrifice car scheme may not be ideal for both employers and employees.

Why Salary Sacrifice Might Not Be Right For Employers

There are several situations where a salary sacrifice scheme may not be the best fit for your company.

High Staff Turnover

If a company has a history of high employee turnover, salary sacrifice car leasing will not be suitable. This scheme is designed to encourage long-term employee retention, so it’s not practical or financially viable to commit to a lease period if employees are unlikely to complete the full term.

Employees Earning Minimum Wage

Salary sacrifice cannot be offered if it would bring an employee’s salary below the National Minimum Wage. If a large portion of your company’s workforce earns near minimum wage, this benefit may not apply to your company.

Reduced Value of Other Benefits

A reduced salary can lower the value of other employee benefits, such as life insurance and pension contributions (if these are also tied to salary sacrifice), potentially impacting overall compensation.

When Does Salary Sacrifice Not Work For Employees?

Similar to the points above, if an employee earns the National Minimum Wage or works for a company with high staff turnover, a salary sacrifice car lease may not be suitable for you. The monthly payments are a long-term commitment, and the employee’s salary cannot drop below the minimum wage at any point. While there are some cases where you might be able to participate if you have variable pay, it’s generally not feasible.

Additionally, a salary sacrifice car scheme may reduce an employee's entitlement to certain tax credits or benefits, such as Child Benefit or Working Tax Credit. It also limits flexibility, as salary sacrifice agreements are binding for a set period. This can make it difficult to adjust any arrangements if the employee's circumstances change, such as getting a new job or moving somewhere where a car is no longer necessary.

Is Salary Sacrifice Right For Me?

A salary sacrifice scheme can be a great option if you’re looking to drive a new car, especially an electric vehicle while saving money through tax benefits. It’s particularly worth it for those who want to reduce their carbon footprint and align with sustainability goals, both personally and within their company.

Salary sacrifice is right for you if:

You want to save money: By paying for your lease through pre-tax income, you can reduce your income tax and National Insurance contributions.
You value convenience: With everything bundled into one monthly payment - such as maintenance, insurance, and breakdown cover - it simplifies the overall car ownership experience.
You have stable employment: Salary sacrifice agreements are long-term commitments (usually 2-3 years), so it’s ideal if you feel secure in your job and earn above the National Minimum Wage!
You’re interested in an electric vehicle: With lower Benefit-in-Kind tax rates for EVs, the savings are even greater, making this an affordable way to transition to electric driving.

Popular Cars Available to Lease

The Electric Car Scheme offers a wide range of popular electric vehicles available for lease through salary sacrifice, significantly reducing costs for employees.

Tesla Model Y electric SUV with cost breakdown. The blue car is shown with green decorative elements. The table lists monthly costs including gross cost of £734 and net cost of £478. — For example, the Tesla Model Y typically costs £734 per month, but with the scheme, this is reduced to just £478, thanks to savings on Income Tax and National Insurance contributions.

Ultimately, salary sacrifice creates a win-win for employees and employers, offering savings and sustainability benefits at no extra cost to the company.

With The Electric Car Scheme, both employers and employees can feel confident they’re getting the best prices, reliable protection against unexpected costs, and support throughout the process.

Last updated: 19/09/24

Our pricing is based on data collected from The Electric Car Scheme quote tool. All final pricing is inclusive of VAT. All prices above are based on the following lease terms; 10,000 miles pa, 36 months, and are inclusive of Maintenance and Breakdown Cover. The Electric Car Scheme’s terms and conditions apply. All deals are subject to credit approval and availability. All deals are subject to excess mileage and damage charges. Prices are calculated based on the following tax saving assumptions; England & Wales, 40% tax rate. The above prices were calculated using a flat payment profile. 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.