What is a Salary Sacrifice Car Scheme?

A salary sacrifice car scheme is a type of employee benefit that allows individuals to lease a car through their employer. These schemes offer a convenient way for employees to have access to a brand new vehicle while enjoying significant cost savings and tax advantages.

Car salary sacrifice schemes operate in a similar way to other salary sacrifice schemes such as Cycle to Work and Childcare Vouchers, the key difference being that the non-cash benefit that they offer is a new car.

In this guide we will explore the key aspects of salary sacrifice car schemes, how they work, their benefits for both employers and employees, potential considerations, and whether they are worth pursuing.

Orange Gridserve Electric Vehicle for Salary Sacrifice Promotion

What is a Salary Sacrifice Car Scheme?

At its core, a salary sacrifice car scheme is a contractual arrangement between an employer and an employee where the employee agrees to forgo a portion of their salary in exchange for the use of a car. Crucially, these schemes allow employees to cover the cost of leasing a vehicle using their gross salary rather than their net income, enabling potential tax savings to be made.

It is important to note that Benefit in Kind (BIK) tax is levied on the non-cash benefits that employees receive in addition to their salary, and this includes the provision of a car through a salary sacrifice scheme. The taxable value of the car is calculated based on factors such as its list price and CO2 emissions.

What Cars Can You Get on Salary Sacrifice?

The car options often include a range of makes and models, although the exact choice will depend on which leasing provider the employer has selected to partner with. 

While all types of car – petrol, diesel, hybrid, electric – can be offered through a salary sacrifice car scheme, the most favourable tax treatment is reserved for electric vehicles as part of the Government’s commitment to promote greener transportation and reduce carbon emissions. The BIK rate for electric vehicles is currently set at just 2% until the end of the 2024/25 tax year, which is significantly lower than diesel and petrol vehicles, making them a particularly cost-effective option for employers and employees.

How Does a Salary Sacrifice Car Scheme Work?

A salary sacrifice car scheme works through an arrangement between employers and employees which lets employees sacrifice salary to access a car through a cost-effective, tax-efficient method. This process involves several key steps:

How Does a Salary Sacrifice Car Scheme Work For Employers:

  1. Selection of a Car Scheme
    • The first step for an employer is to choose an appropriate car scheme. There are various scheme providers out there, each with its unique pros, cons and features. Employers are advised to conduct thorough research, possibly reviewing our comprehensive guide to the best salary sacrifice schemes, to find one that fits with their company’s size, budget, and employee needs.
  2. Registration and Implementation
    • Once a suitable scheme is selected, the employer registers with the scheme provider. The provider plays a crucial role in facilitating the scheme’s rollout, offering tools and support to communicate the benefits and details of the scheme to the employees effectively. This often includes providing an online portal where employees can explore vehicle options and review the scheme terms.
  3. Support and Administration
    • Employers, with the help of the scheme provider, manage the administrative aspects of the scheme. This includes handling the salary deduction arrangements, liaising with the lease company, and ensuring that the scheme complies with all relevant tax and legal requirements.

How Does a Salary Sacrifice Car Scheme Work For Employees:

  1. Learn About Your Company’s Scheme
    • Interested employees need to understand how the salary sacrifice scheme affects their pay, tax, and benefits. This involves reviewing the available information, attending information sessions provided by the employer or the scheme provider or viewing any other internal communication provided.
  2. Vehicle Selection
    • Employees have the opportunity to select a vehicle from the range offered by the leasing provider associated with their employer’s scheme. The selection includes various types of vehicles, such as electric, hybrid, petrol, or diesel cars, catering to diverse preferences and needs. The choice of vehicle will impact the monthly sacrifice amount and the overall cost-effectiveness of the scheme for the employee.
  3. Lease Agreement and Benefits
    • Upon selecting a vehicle, the employee enters into a lease agreement, which outlines the terms, duration (usually between two to five years), and the monthly salary sacrifice amount. This arrangement often includes additional benefits like maintenance, EV insurance, breakdown cover, and road tax, providing a comprehensive package that covers most vehicle-related expenses.
  4. Salary Deduction and Tax Benefits
    • The agreed-upon sacrifice amount is deducted from the employee’s gross salary before tax, resulting in potential savings on income tax and National Insurance Contributions. The exact financial impact depends on the employee’s tax bracket and the value of the car. Employees are encouraged to review this arrangement periodically, especially if tax rates or personal circumstances change, to ensure the scheme remains beneficial.
  5. End of Lease Considerations
    • At the end of the lease term, employees may have the option to renew the lease, choose a new vehicle under the same scheme, or terminate their participation. It’s important to understand the terms related to the end of the lease, including any responsibilities for excess mileage or wear and tear.

Who is Eligible for a Car Salary Sacrifice Scheme?

It’s worth noting that not all employees may be eligible for a salary sacrifice car scheme. The availability of such schemes will depend on the specific eligibility requirements set by the employer which may include the employee’s length of employment and their income level. Therefore, employees must check with their employer to determine if they qualify for a salary sacrifice car scheme.

The eligibility criteria for car salary sacrifice can vary between schemes, with individuals typically needing to fulfil some or all of the following requirements:

  • Age requirement
    Employees must usually be at least 18 years old, although some employers may set a higher minimum age for insurance purposes.

  • Residency
    Applicants must be permanent residents of the United Kingdom.

  • Driving licence
    A valid driving licence is mandatory for the entire duration of the lease period.

  • Employment status
    Eligible participants must be permanent PAYE employees who have completed their probationary period.

  • Income threshold
    The employee’s gross basic pay should not fall below the National Minimum Wage after accounting for the salary sacrifice deduction.

  • Lengthof service: Some schemes may stipulate a minimum employment period, such as 12 months, as a prerequisite for eligibility.

Benefits Of A Salary Sacrifice Car Scheme

A salary sacrifice car scheme offers a wide range of benefits to employers and employees.

What Are the Benefits of a Car Salary Sacrifice Scheme for an Employee?

Employees can enjoy numerous advantages by participating in a salary sacrifice car scheme. These include:

  1. Tax savings
    Since the lease payments are deducted from the employee’s pre-tax salary they effectively reduce the employee’s taxable income. This can result in lower income tax and National Insurance Contributions leading to potential savings. The cost savings associated with being part of a car salary sacrifice scheme make it a more affordable way of leasing than a personal contract hire (PCH) agreement, although how much you can save will depend on your tax position and the type of vehicle you choose. For a new EV, an employee could potentially save between 30-60% by going down the salary sacrifice route rather than taking out an equivalent PCH agreement.

  2. All-inclusive car packages
    Salary sacrifice car schemes often include additional benefits such as maintenance, breakdown cover, road tax, servicing and insurance packages reducing the financial and administrative burden of running a car. This means that employees have peace of mind knowing that the leasing company will take care of all maintenance and servicing requirements, ensuring that the car is always in optimal condition. The inclusion of these additional benefits can make the overall cost of running a car more affordable and predictable. All-inclusive car packages can mean that the only cost that an employee needs to worry about is fuel or electric charging.

  3. Access to new cars at a lower price
    Employees can drive a new car without the substantial upfront costs associated with traditional financing. A salary sacrifice car scheme does not require a deposit, and the monthly cost will usually be lower than financing the same vehicle through a hire purchase agreement or car loan. Because the leasing company can exercise greater buying power than an individual, it is often able to negotiate bigger price discounts which employees can take advantage of through a salary sacrifice scheme.

  4. The latest vehicle choice
    Employees can select a company car that suits their preferences and needs, and can access the latest innovations. Vehicles obtained through a salary sacrifice scheme are brand-new models equipped with cutting-edge technology, boasting advantages such as low emissions and greater fuel efficiency.

  5. A reduced carbon footprint
    Salary sacrifice car schemes can be environmentally friendly, many employers offer a range of low-emission and electric vehicles as part of their scheme.
Tesla Supercharger with busy road behind it

What Are the Benefits of a Car Salary Sacrifice Scheme for an Employer?

Implementing a salary sacrifice car scheme provides a host of advantages for employers. These include:

  1. Boosting recruitment and retention
    Car salary sacrifice can serve as a powerful recruitment and retention tool as it is often viewed as a high-value perk. In industries where competition for skilled professionals is fierce, offering an attractive rewards package that includes a salary sacrifice car scheme could provide a competitive edge. Potential employees are more likely to be attracted to and stay with employers that go beyond traditional compensation structures.
  2. Promoting a positive company image
    Offering a salary sacrifice car scheme, especially one that provides environmentally friendly options like electric vehicles, can help a business align with its Corporate Social Responsibility (CSR) values and meet sustainability goals. This commitment can contribute to a positive public image, demonstrating an organisation’s responsibility towards environmental concerns.

  3. Lower National Insurance Contribution bills
    Employers participating in salary sacrifice car schemes should benefit from reduced National Insurance Contributions as the employee’s salary is sacrificed before these contributions are calculated.

  4. Enhanced employee well-being
    Supporting employees in obtaining reliable transportation can positively impact their overall well-being and job satisfaction. A salary sacrifice car scheme ensures that employees have well-maintained, dependable vehicles, reducing the stress associated with commuting and transportation challenges.

  5. Mitigate grey fleet concerns
    The grey fleet, whereby employees use their personal vehicles for work-related purposes, often raises issues related to liability, maintenance, safety, and environmental impact. By implementing a salary sacrifice scheme, employers can incentivise employees to opt for company-provided vehicles that are adequately insured and maintained, reducing the reliance on the grey fleet. This not only ensures better control over vehicle standards and maintenance but also allows employers to manage their duty of care more effectively.

What to Look Out for in Salary Sacrifice Car Schemes

While the best salary sacrifice car schemes offer considerable benefits, employers and employees must familiarise themselves with the full terms and conditions and try to identify any potential hidden costs before they set up or join a scheme.

Carefully Review the Salary Sacrifice Terms and Conditions

As an employee or employer you should make sure that you fully understand what is covered in your salary sacrifice car scheme’s terms and conditions. These terms will outline the rules and regulations that govern the scheme, including eligibility criteria, leasing options, and any limitations or restrictions imposed. In particular, look out for:

Contract duration
Thoroughly review the range of lease duration options to ensure that they match your needs. It’s important to consider your personal circumstances when deciding on the lease duration. Think about factors such as your financial situation, lifestyle, and future plans. Check if the scheme allows options to extend or renew the lease at the end of the term.

Mileage limits
Be clear about the agreed-upon mileage limit in the lease. When you take out a lease you will usually have to state your annual expected mileage. Understanding this is crucial, as exceeding the limit may result in additional charges. Assess the charges associated with exceeding mileage limits. Some schemes may have more favourable excess mileage rates than others. It may be worth exploring whether there’s flexibility in adjusting mileage limits during the lease period to accommodate changes in your driving needs.

Insurance coverage
Review the insurance coverage provided by the scheme, ensuring it meets your needs. As part of this review identify any limitations or damage exclusions in the insurance coverage. What is the excess? Are there any age restrictions? Can you add additional drivers to the policy?  You may also want to clarify whether the insurance coverage extends to both personal and business use, especially if the vehicle is intended for work-related purposes. 

Additional services
When exploring salary sacrifice car schemes, it’s worth considering what additional services are included as these can enhance its overall value and convenience. Look for schemes that go beyond the basics, offering comprehensive benefits such as breakdown cover to ensure peace of mind in case of emergencies. Additionally, consider schemes that include services like tyre replacement, providing coverage for wear and tear items that can incur unexpected cost.

End-of-Lease Options
Clarify the options available at the end of the lease term, such as purchasing the vehicle or entering into a new agreement. If purchasing the vehicle at the end of the lease is it possible to determine the purchase price or formula used to calculate it as this could impact your decision to buy the vehicle.

Tesla on charge with a public charger

Try to Identify Any Hidden Costs

Excess mileage charges
Be very mindful of any charges for exceeding your agreed-upon annual mileage limit, as these can add up significantly. It is worth assessing how excess mileage charges are calculated. Some salary sacrifice car schemes may have fixed rates, while others may use a graduated scale. Excess mileage charges can also vary depending on which car is chosen. 

Maintenance and repair costs
Review the scope of maintenance covered by the scheme and look out for any additional costs that may arise. These extra costs may include certain repairs, replacements or non-routine services. Understand the schedule for routine servicing and whether it aligns with the manufacturer’s recommendations. Also check to see what end-of-contract charges there may be for returning the car at the end of the lease if there is any excessive wear or tear, or damage, to it.

Early termination fees
Leaving a car salary sacrifice before the end of the contract can be complicated so assess the implications and potential costs associated with terminating the lease agreement prematurely. Look out for any early termination protection that may be in place and understand what it covers. Sometimes, this will only kick in after you have had the lease for a specified length of time or only cover certain reasons for leaving the scheme.

There may also be a limit to the number of early termination protection claims a business can make each year. In some cases, the scheme may increase the monthly rental during the initial six months of the lease, to establish a financial cushion for offering early termination protection.

What Happens if an Employee Leaves the Company?

If an employee leaves the business before the end of their salary sacrifice agreement they will usually need to return the car to their employer and may be required to pay an early termination fee or penalty. This is because the departure of an employee can affect the financial structure of the car sacrifice scheme and the leasing company will need to offset its costs.

An early termination fee is typically calculated as several months’ worth of remaining payments, with the precise number of months decreasing as the later into the lease that the termination occurs.

If an early termination fee is incurred, your employer will either deduct it from your net pay or send you an invoice if you have already departed from the employment.

Many car sacrifice schemes include early termination protection, which serves as a valuable safety net for employers and employees by mitigating the financial impact of an early exit. Early termination protection typically covers unforeseen circumstances such as redundancy or voluntary termination due to health issues. The specifics of the protection will depend on the terms outlined in the car sacrifice scheme documentation. It may be the case that the early termination protection only covers certain scenarios in which an employee leaves and may only pay part of the costs incurred by an early termination.

In the event of early termination there may be other options that an employee could explore. For instance, some schemes may allow the transfer of the lease to another employee, or for it to be moved to your new employer allowing you to continue to enjoy the benefits of salary sacrifice. Alternatively, you may be able to purchase the car.

Are Salary Sacrifice Schemes Worth it?

Whether or not a salary sacrifice car scheme is worth pursuing will ultimately depend on your individual circumstances and preferences.  Employees should consider the impact on their take-home pay and their overall budget and compare salary sacrifice schemes with alternative financing options, such as traditional car loans or personal leasing before committing to a salary sacrifice car scheme. 

It is important to acknowledge any potential drawbacks such as restrictions on mileage or vehicle choice, and weigh them up against the benefits. You should also think about the long-term implications of participating in a salary sacrifice car scheme, especially your career plans and what it could mean if you need to leave the scheme early if your circumstances change.

However, for those looking to achieve considerable savings on a brand new car, who value the convenience of a fixed monthly payment, reduced tax liabilities, and access to additional benefits like maintenance and insurance, a salary sacrifice car scheme could be hard to beat.

Similarly, from an employer’s perspective there are a host of reasons why setting up and offering a salary sacrifice car scheme could be a worthwhile investment, which extend beyond a lower National Insurance Contribution bill. These salary sacrifice schemes have the power to attract and retain top talent, enhance a company’s public image and positively impact the well-being and job satisfaction of employees.

Overall, in the realm of employee benefits, salary sacrifice car schemes stand out as a win-win solution for both employers and employees.

This article is not financial advice. Whether a salary sacrifice car scheme is right for you can vary based on individual circumstances and the scheme rules. It is advisable to consult financial advisers, scheme providers and your employer for personalised guidance.

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