Car Salary Sacrifice: How It Works & What You Need to Know
A company car is a sought-after perk, and salary sacrifice schemes make it easier to afford one. But not all schemes include extras like insurance or maintenance, so it's important to understand the full picture before committing.
Salary sacrifice is a popular way to drive a car at a lower cost, but how does it work, and is it the right choice for you? Here’s what you need to know.
What is Salary Sacrifice?
Salary sacrifice is an employee benefit scheme where you give up part of your pre-tax salary in exchange for a leased car. Because the deduction is made before tax and National Insurance, it often works out cheaper than getting a car through a personal lease.
The savings are even better if you opt for an electric vehicle (EV), thanks to lower Benefit-in-Kind (BiK) tax rates.
How Does the Tax Work?
If you use your salary sacrifice car for personal trips, you’ll need to pay BiK tax. The amount depends on:
- The car’s value (known as the P11D price, which is the list price including extras and VAT).
- Its CO2 emissions (lower emissions = lower tax).
- Your income tax band (20%, 40%, or 45%).
For example, if your car’s BiK percentage is 25% and its value is £30,000, your taxable amount is £7,500. If you're in the 20% tax bracket, you'd pay £1,500 per year in BiK tax.
EVs have much lower BiK rates, making them the most tax-efficient option. Plus, since salary sacrifice reduces your taxable income, you save on both income tax and National Insurance.
The car is owned by the business, and depending on the agreement, your employer may cover extra costs such as insurance, repairs, and fuel—making it even more cost-effective.
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Benefits of Salary Sacrifice
Salary sacrifice has several advantages over traditional car finance options:
- Tax Savings – Payments come out of your gross salary, reducing your taxable income and lowering your tax and National Insurance contributions.
- No Upfront Costs – Unlike a personal lease or purchase, there’s no large deposit required.
- Lower Monthly Costs – Employers may cover costs like insurance, servicing, and repairs.
- No Credit Checks – Since the car is leased through your employer, personal credit checks aren’t necessary.
- Electric Vehicle Incentives – EVs have a BiK rate as low as 2%, making them significantly cheaper in tax than petrol or diesel cars.
- Business-Owned Vehicle – If you prefer not to have the car in your name, this setup keeps it under the company’s ownership.
Potential Downsides
While salary sacrifice has plenty of perks, there are some downsides to be aware of:
- Lower Take-Home Pay – Your salary is reduced, which could affect things like mortgage applications.
- Commitment to Employer – If you leave your job, you might need to return the car or pay an early termination fee.
- Employer Restrictions – Some businesses only offer limited car choices, often prioritising lower-emission vehicles.
- Impact on Other Benefits – Since salary sacrifice lowers taxable income, it could affect pension contributions, maternity pay, and certain state benefits.
Salary Sacrifice vs Other Company Car Options
Not sure if salary sacrifice is right for you? Here’s how it compares to other ways of getting a company car:
Traditional Company Car Scheme
Your employer leases or owns a car, and you pay BiK tax. They cover maintenance and insurance, but you don’t own the car and usually have limited choice over models.
Car Allowance
Instead of a company car, your employer gives you extra salary to use towards a car. You don’t pay BiK, but you do pay tax on the extra salary, and you’re responsible for all car costs.
Salary Sacrifice
You lease a car via your employer, with payments taken from your gross salary. You save on tax and NI, and the scheme usually includes maintenance, insurance, and breakdown cover.
Why Electric Vehicles Make Sense
EVs are the most cost-effective salary sacrifice option because:
- They have a BiK rate of just 2% (until at least 2028).
- Running costs are lower than petrol or diesel.
- No road tax and potential savings on congestion charges.
With more people switching to electric, salary sacrifice is an attractive way to drive an EV without the hassle of ownership.
How Employers Benefit from Salary Sacrifice
Businesses can also gain from offering salary sacrifice schemes:
- Lower Employer NI Contributions – Since employees' taxable income is reduced, businesses pay less National Insurance.
- Attractive Employee Perk – Helps attract and retain staff by offering a valuable benefit.
- Sustainability Goals – Encourages uptake of EVs, supporting green initiatives.
FAQs
1. Do all employers offer salary sacrifice schemes?
No, not all employers provide this benefit. It depends on company policy and whether they have set up an agreement with a leasing provider.
2. How does salary sacrifice compare to a personal lease?
Salary sacrifice is often cheaper because payments come out of your pre-tax salary, reducing your taxable income. Personal leases are paid from your net salary and don’t offer the same tax savings.
3. What happens if I leave my job?
You may need to return the car or pay an early termination fee, although some schemes allow lease transfers to your new employer.
4. Are there eligibility requirements?
Yes. Your salary must remain above the National Minimum Wage after the deduction, and you may need to have passed your probation period.
5. Does salary sacrifice affect other benefits?
It can. Because your taxable salary is lower, it may impact mortgage applications, pension contributions, and certain state benefits.
6. Why is salary sacrifice better than paying for a car with post-tax salary?
With salary sacrifice, the cost of the car is deducted before tax and National Insurance. This reduces your taxable income, meaning you pay less tax and NI. Paying from your net salary doesn’t offer these savings.
7. How much could I save?
For example, if Jane earns £40k and leases an EV through salary sacrifice, she could save hundreds per month in tax and running costs. Always compare the figures before committing.
Final Thoughts
Salary sacrifice can be a great way to get a new car while saving money on tax and running costs. If you’re considering it, check with your employer to see what’s available and make sure it fits your financial situation.
Got questions about tax on salary sacrifice schemes? Contact Blue Rocket Accounting today – we’ll help you steer through the numbers and make the right choice!
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