Traditionally, when you wanted to buy a new vehicle there would be a limited number of options to do this; cash, vehicle finance, or using personal/business loans, but more recently a new option has become available salary sacrifice.
Businesses and employees can both benefit from salary sacrifice, so we take a look at how the schemes work and the benefits.
What is salary sacrifice?
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.
How do salary sacrifice schemes work?
As with salary sacrifice schemes for pensions, or cycle-to-work schemes, employees save money by exchanging part of their salary before it is taxed; thereby reducing the amount of tax and national insurance they pay on the remainder. As the vehicle is classed as a ‘Company Car’ (’Benefit in kind’) ‘company car tax’ must be paid at the prevailing rate for the vehicle (via an amended tax code) however this is much less than the savings to be made in income tax and NI – especially for zero-emission electric cars. At the end of the contract, the keys can either be handed back and collected or a new car can be ordered.
Are there any changes in tax with salary sacrifice?
A driver will be taxed on whatever the greatest is between:
a) the Income Tax due on the amount of salary sacrificed on the finance rental of the vehicle, or
b) the Benefit in Kind (BIK) charge on the car, which is determined by the P11D and CO2 emission levels of the vehicle.
A driver will not pay income tax on the amount of salary sacrificed to cover the maintenance and insurance elements in the agreement, saving them money.
What types of vehicles are included?
Almost any private vehicle is available on a salary sacrifice scheme, however, salary sacrifice is most effective with an electric car (or van) because the Benefit in Kind (BIK) rate is only 1% in 2021/22 and then will be capped at 2% until 2024/25.
What are the downsides to salary sacrifice?
As with all salary sacrifice schemes, purchasing a car via this method might not suit everyone's requirements, for example:
With salary sacrifice, your net salary will be reduced, this may cause an issue if you would like to apply for a mortgage, loan, or another form of finance.
Also, you will be required to keep the car and fulfill the contract unless you leave the company, and as the monthly rentals are deducted from your salary before tax, there is little to no flexibility if you find yourself in a position where the vehicle becomes unaffordable.