What is a salary sacrifice?

A salary sacrifice (or a salary exchange) in the UK is an arrangement employers can make available to employees. In this arrangement, part of employees’ pre-tax salary is exchanged for other benefits, usually non-cash items.

We have written an extensive article about salary sacrifice car schemes for our HMRC mileage guide with updated information. It includes in-depth information about the tax implications and the benefits of choosing an electric car.

Salary sacrifice in exchange for a company car

As an employee, you can give up a portion of your pre-tax salary each month in exchange for a company car. The sacrificed sum is taken pre-taxation, so you save on income tax and National Insurance Contributions (NIC). 

You lease it from a third-party supplier that has partnered with your employer. The cost of the car is deducted from your salary every month. Unlike company car schemes, where the company pays for the car and maintains it, you pay for the car in salary sacrifice arrangements, and it is your responsibility to maintain it.

If you use your new car for private and business, see our HMRC mileage guide to learn how to keep HMRC-compliant records for your mileage reimbursement or deductions.

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Salary sacrifice car taxation

It is important to note that a salary sacrifice car is still eligible for a company car tax, known as a benefit in kind. This additional tax is charged monthly based on the car's value, its CO2 emissions, and your tax bracket.

Other benefits to buying a car through the salary sacrifice scheme

Besides reduced income tax and NIC, you may have access to large fleet discounts through your employer, possible VAT savings and no credit checks to undergo for the purchase. You won’t provide a deposit and will use a fully maintained and insured new vehicle for the lease period.

When purchasing a new car, the salary sacrifice scheme is extremely comprehensive. It typically includes all servicing and maintenance costs and can also include costs of unlimited tyre replacements and repairs, depending on the lease provider. You can take advantage of fixed-cost and fully comprehensive motor insurance for the contract period with two extra named drivers allowed, road tax for your vehicle for the contract term (at the prevailing rate), and full vehicle roadside breakdown and service. 

Once you agree to a salary sacrifice car scheme, you are locked in for the duration of the contract unless you leave your job, at this point, you will have to give the car back.

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