Salary Sacrifice Company Car: Is It Worth It?
The number of company cars in the UK has been steadily declining since 2015, largely due to the removal of tax incentives and corporate cost-cutting. However, there was an uplift from 2022 to 2023, where 760,000 people reported receiving the company car benefit - an increase of 40,000 from the previous year. This jump could suggest that more employers in the UK are offering salary sacrifice schemes or car allowances, making these employee benefits increasingly accessible.
In this blog, we’ll explore what a company car salary sacrifice is, its benefits and drawbacks, and whether it’s worth implementing or using your company’s scheme. We also compare salary sacrifice to car allowances and traditional car company car offerings.
What Is a Salary Sacrifice Company Car Scheme?
A salary sacrifice car scheme is a workplace benefit that allows employees to pay for a car from their pre-tax salary, meaning they save on National Insurance contributions and income tax. The car is leased from a third-party leasing company to the employer and is the employee’s responsibility to maintain.
A salary sacrifice company car scheme differs from traditional company car programmes in several ways, such as:
Salary Sacrifice Allows You To Save On Tax
Since the employer deducts money from an employee’s gross salary, it reduces their taxable income, saving them money. Much like a traditional company car agreement, employees do have to pay company car tax (otherwise known as Benefit-in-Kind or BiK), which is based on the car’s CO2 emissions.
Bundle Everything Into One Payment With Salary Sacrifice
A salary sacrifice scheme lets you include maintenance, breakdown cover, insurance, and even a home charger for EVs in your fixed monthly payment. This means employees can also save on tax for these services.
No Deposit Needed For Salary Sacrifice
Some salary sacrifice schemes, like electric car salary sacrifice schemes in particular, do not require you to put down a deposit, unlike a traditional company car lease.
Salary Sacrifice Offers More Flexibility
Traditional company car schemes may restrict personal use and limit insurance to family members. Salary sacrifice, however, offers more control and flexibility. When opting for a salary sacrifice car, you can choose the lease term, estimate your annual mileage, and decide between an accelerated or flat payment profile.
Benefits Of Salary Sacrifice For Company Cars
There are several benefits which can make leasing a car through salary sacrifice seem like a ‘no-brainer.’
Wide Range Of New Cars For a Low Price
If you choose a salary sacrifice provider that uses external leasing companies to supply the cars to you, then you will have a wide range of new and used cars to choose from for less. In many cases, this works out to be cheaper than your employer buying a car from a dealership.
All Employees Can Access a Salary Sacrifice Scheme
As long as employees earn above minimum wage and leasing a car through salary sacrifice doesn’t push them below this threshold, all employees can access the scheme. Unlike traditional company cars, salary sacrifice is available to everyone, regardless of seniority, making it a fairer option.
No Individual Credit Checks
In terms of electric car salary sacrifice, you do not have to pass an individual credit check. This is because all salary sacrifice leases are business contract hires instead of personal contract hires, which means the company or employer is technically leasing the vehicle on the employee’s behalf.
Disadvantages And Risks Of Salary Sacrifice
There are many benefits to a salary sacrifice car scheme, but there are some drawbacks that employees should consider before committing to a long-term lease.
Lowering Your Salary In Exchange For The Benefit
Employees agree to sacrifice part of their salary, which may affect the amount they can borrow for a mortgage or other loans.
The Salary Cannot Drop Below National Minimum Wage
A salary sacrifice scheme has the potential to reduce an employee's earnings below the National Minimum Wage depending on how much they earn. This could then lead to compliance issues for both employees and employers. In short, the employee’s take-home pay cannot fall below the National Minimum Wage.
| 21 and Over | 18 to 20 | Under 18 | Apprentice | |
|---|---|---|---|---|
| Pay | £11.44 | £8.60 | £6.40 | £6.40 |
How Does a Salary Sacrifice Car Scheme Work In Practice?
A salary sacrifice car scheme means employees can get a new car by sacrificing a portion of their gross salary before tax and National Insurance are deducted. As previously mentioned, the employee has to pay a small amount of company car tax, otherwise known as Benefit-in-Kind tax or BiK. This is because the car is a taxable benefit provided by the employer.
If an employee chooses to salary sacrifice a car, the savings will depend on their tax bracket. Generally, the higher the employee’s earnings, the greater the potential savings. The table below outlines the different tax brackets in the UK.
| Band | Taxable Income | Tax Rate | |
|---|---|---|---|
| Personal Allowance | Up to £12,570 | 0% | |
| Basic Rate | £12,571 to £50,270 | 20% | |
| Higher Rate | £50,271 to £125,140 | 40% | |
| Additional Rate | Over £125,140 | 45% |
The employer leases a car on behalf of the employee, and the employee agrees to pay the lease payments from their pre-tax salary. As previously mentioned, the monthly payments can also include insurance, maintenance, road tax, breakdown cover, MOT, replacement tyres and in some cases a home charger - all of which can be paid for from the employees pre-tax salary.
The employee is responsible for fuel costs and excess charges for damages and repairs. At the end of the lease, the employee can either choose to return the car or purchase it for an agreed amount.
What Happens From An HMRC Perspective?
HMRC treats a car acquired through salary sacrifice the same as company cars for tax purposes, requiring employees to pay BiK tax based on the car’s value, CO2 emissions, and list price, with lower emissions leading to a lower tax rate. Employers must report the car to HMRC, calculate the benefit’s value, and deduct it from the employee’s salary via PAYE while also paying National Insurance Contributions (NIC) on the benefit. Although the employer typically provides insurance, the employee is responsible for any excess. Additionally, casual users of the car for business journeys are reimbursed at the HMRC-approved company car rate.
Who Owns The Car In a Salary Sacrifice Agreement?
In a salary sacrifice agreement, the employer owns the car, not the employee. The employer will enter a Contract Hire Agreement for your chosen car and then will provide it to the employee under the salary sacrifice arrangement. The employer leases the car on the employee’s behalf and the employee makes monthly payments from their pre-tax salary. If an employee leaves their job, they usually need to return the car.
Is Opting For a Salary Sacrifice Car Financially Advantageous?
Generally speaking, a salary sacrifice car scheme can be financially viable for some employees depending on their salary and tax bracket. Through salary sacrifice, you can get a new or used car for less than the cost of leasing it privately. The fixed monthly amount taken salary can include insurance, maintenance and more to make the process of leasing a car easier and cheaper because the tax savings also apply.
Potential Savings and Costs
As shown in the image below, you can lease a Volkswagen ID.7 for £427 through salary sacrifice. Without the tax savings, the cost would be £632. However, with salary sacrifice, you’ll save £253 on income tax and £13 on National Insurance. You will have a small BiK charge of £61 per month.
Without salary sacrifice, the cost of a BMW i4 would be £817. However, by choosing salary sacrifice, you can save £327 on income tax and £16 on National Insurance, reducing the net cost to £533.
How Does Salary Sacrifice Compare To Private Leasing Or Purchasing?
Private leasing and salary sacrifice schemes share many similarities. In both cases, when someone leases a car, a leasing company purchases a new vehicle on their behalf, becoming the owner. The lease company then leases the car to either the employee or the employer, allowing the employee to use it for the duration of the lease agreement. The key difference with salary sacrifice is that the employer leases the car from the lease company and then subleases it to the employee.
Buying a car means you own the vehicle once your payments have been made. One of the biggest barriers to more people driving electric is the initial price point, the average price of an electric car in the UK is £46,000. If you’re debating between salary sacrifice or buying an EV upfront, you should consider upfront costs, potential depreciation of the car and your driving habits.
Salary Sacrifice vs Car Allowance vs Traditional Company Cars
It can be difficult to know whether you getting a company car through the traditional sense, a car allowance or salary sacrifice makes the most sense. Here are the pros and cons of all three.
| Car Allowance | Salary Sacrifice | Traditional Company Car | |
|---|---|---|---|
| Flexibility | Employees have the freedom to choose their car and how they pay for it. | The cars available are limited to the salary sacrifice provider and the leasing company they partner with, which can be limiting in some cases. | Historically, employees didn’t get much choice because employers would buy the same make and model in bulk. Now, employees are usually able to choose from a pre-approved list of cars. There may also be some rules on how an employee uses the car outside of work. |
| Tax | A car allowance amount is added to the employee's salary and deductions are then made through PAYE by the employer | Employees agree to sacrifice some of their salary before tax. | Employees will need to pay the company car tax, known as Benefit-in-Kind (BiK). |
| Maintenance | Employees are responsible for maintaining the car themselves, meaning this is an additional cost on top of car payments. | Employees can bundle maintenance into their monthly payments (saving on NI and income tax contributions), making the process easier. | It is the company’s responsibility to make sure the car is serviced on time and has a valid MOT as the employee is not financially responsible. |
| Return Policy | Employees can keep the car if they leave the company. | Employees must return the car if they leave the company. | Employees must return the car if they leave the company. |
A car allowance may be ideal for employees who already own a car or have low transportation costs. In contrast, a salary sacrifice scheme is better suited for those in higher tax brackets looking to take advantage of available tax savings. While the traditional company car route is less popular today, it is typically reserved for senior employees, making it less inclusive than the other two options.
Whether you’re an employee or employer exploring a salary sacrifice scheme, The Electric Car Scheme offers an excellent way to make electric vehicles more affordable and accessible to a wider audience. Learn more by visiting our website.
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.
