Salary sacrifice car scheme

The salary sacrifice car scheme (also known as a salary exchange) in the UK is an arrangement that employers may make available to employees, where 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 and leasing a car

As an employee, you can sacrifice a fixed amount of your salary each month in exchange for a new car. The sacrificed sum is taken pre-taxation, so you save on income tax and NI contributions when buying a car through your employer.

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

If you use your new car for business purposes too, 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 clarify 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 value of the car, its CO2 emissions and your tax bracket.

Other benefits to buying a car through the salary sacrifice scheme

Besides reduced income tax and national insurance contributions, 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 be providing a deposit and will use a fully maintained and insured new vehicle for the period of the lease.

The salary sacrifice scheme when purchasing a new car is extremely comprehensive and includes all servicing and maintenance costs, the costs of unlimited tyre replacements and repairs. You can take advantage of a fixed-cost and fully comprehensive motor insurance for the contract period with two extra named drivers allowed, road tax for your vehicle for the term of your contract (at the prevailing rate), 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 which point you will have to give the car back.

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