What Is A Salary Sacrifice Car Scheme?
A salary sacrifice car lease is when you ‘sacrifice’ a portion of your salary (before tax) in exchange for a non-cash benefit, such as a brand new lease car. By paying for a car lease from your salary before tax, you are saving on the personal income tax that you would have received if you were paid your salary as normal. The savings and other benefits of a salary sacrifice can be significant for both employees and employers.
A salary sacrifice is most effective with an electric car (or van) because the BIK rate is only 1% in 2021/22 and then will be capped at 2% until 2024/25. For example, if you were looking to get a brand new Tesla Model 3 lease deal through a salary sacrifice that was £580 per month, through this scheme £580 every month would be deducted from your gross salary. You would then receive your salary and pay tax and NIC from this new reduced salary. This means that you are paying less tax than you would if you had the car amount paid through your salary as normal – saving you a considerable amount of money!
Advantages And Disadvantages Of The Salary Sacrifice Scheme
There are a whole bunch of benefits for both employers and employees for a salary sacrifice so we touch base on all the main benefits, as well as the drawbacks, of this scheme to make sure you know what’s in it for you.
Advantages Of The Salary Sacrifice Scheme
Savings
The main benefit is that the monthly payments for the car will be reduced and can be much cheaper than getting a car individually. As the car is paid for using your pre-tax income, you don’t have to pay the normal tax or NIC on this and neither will your employer, which can add up to an incredible saving.
Easy process to get a new car
For employees, this scheme means that the employer will be responsible for arranging all of the finance for the car lease. This also means that you won’t be hit with a big upfront fee in the first instance to get the car, and you won’t have to go through a personal credit check. It is a hassle-free way to get a new car as there is no need to work out costs every month as it comes out of your salary.
No financial risk
As the salary sacrifice lease is financed through the employer, you are not tied to a car if you need to leave the company for any reason. This is also an advantage for employers as the employer does not have to keep the car if the employee does leave (as it is paid for by their income).
Increase employee retention
Having a salary sacrifice scheme is an attractive benefit to potential employees and often can increase employee retention by offering a car that can be used for both personal and business usage. Being able to offer your employees a range of cars while also saving them money by doing so is a great way to stand out when recruiting new employees and can significantly improve a company’s image.
Disadvantages Of The Salary Sacrifice Scheme
Reduction of salary
There are certain disadvantages to getting a reduced salary. This could potentially impact any credit or mortgage applications; it may affect the level of maternity pay you receive; any life cover offered through your job; pension amounts or potentially salary-based redundancy settlements. Therefore it is important to think about whether this will suit you.
Early termination fees
The finance is the employer’s responsibility, which is good for the employee as they are not tied down to a contract. However, if the employee leaves the company during the lease term agreement, then the employer will be left with the remaining costs for the car and will either need to continue to pay the monthly payments or pay an early termination fee.
Employee leave
If in the instance that an employee takes maternity or a similar leave, the employer will still need to provide the benefit, even though they will no longer be receiving the salary to sacrifice. This is because if an employee is getting statutory maternity pay, the salary cannot be sacrificed from this and the employer would need to cover the costs of the vehicle, which is a risk to consider for employers.
Lower incomes
A salary sacrifice is unlikely to work for people who are on a lower income, as your take-home salary cannot fall under the national minimum wage.
Is The Salary Sacrifice Scheme Right For You?
Getting a car through a salary sacrifice scheme is an excellent way to get a brand new car for a cheaper cost. If you are on a minimum wage contract, or on a wage that would push you below minimum wage once the car amount has been removed from your salary, then this scheme will not be the right one for you. As long as this isn’t you, you can get yourself a brand new car every few years using the scheme.
The fuel of the car you are looking for may also play a big part in whether this scheme is right for you. As the employee will still need to pay Benefit in Kind (BiK) for the car, an electric car is a much cheaper option. This is because BiK rates for EVs are 1% for 2021-22 and will be going up to 2% after this. For other cars, including petrol and diesel, this BiK rate can go up to 37% for cars that produce over 170g/km of CO2, which can be quite costly. This means that the salary sacrifice will be significantly cheaper for electric vehicles and is best for green vehicles with emissions under 75g/km of CO2.
If you’re not too sure if this is for you and would like to know other alternatives to a salary sacrifice, then our guide on company car or car allowance is worth reading to learn more.
Do You Pay Tax On Salary Sacrifice Cars?
A salary sacrifice lets you pay for a car every month using your gross salary before it is taxed and other contributions are deducted from it, so you don’t pay tax on the portion of salary that is being used to pay for the car. That said, you will need to pay Benefit in Kind tax, which is incredibly low at 1% in 2021/22 and 2% after this for electric cars, although, it can be much higher for petrol and diesel cars. This means that the scheme is the most cost-effective with electric cars.
Can I Salary Sacrifice Two Cars?
Yes, you can have more than one car under the salary sacrifice scheme provided that the salary that has been sacrificed does not fall below minimum wage, and of course as long as your employer approves your request for more than one car under the scheme.
If you think that a salary sacrifice scheme would be a great benefit for you, LeaseLoco has the hottest car leasing deals on the market and make it super quick and easy for you to find the perfect deal for you in just a few clicks.