Salary sacrifice car scheme

A salary sacrifice car scheme is a way to lease a car through your place of work. As such, it is an employee benefit made available by an employer. 

Your salary will be reduced pre-tax, reducing the income tax and NIC you need to pay. Instead, you will be taxed based on the value of the benefit. 

Electric car salary sacrifice schemes are taxed less, making them an option worth considering in many cases.

Salary sacrifice pros and cons

There are advantages and disadvantages to getting a car through a salary sacrifice scheme. How you weigh these is a matter of preference and circumstances. 

Pros

You will get more car for your money

• Your employer has more leverage when negotiating with a leasing company than an individual would.
• The tax benefits, especially those for EVs, result in more value for money.

It’s a no-hassle way to get a car

• Your employer deals with lease payments and taxes. 
• Leasing agreements usually include vehicle maintenance.
• Many EV schemes also include a home charging point. 

Cons

The car is tied to your employer

• If your employment is terminated, you lose the car as well.

Limited selection of cars

• Depending on your employer's agreement with the leasing company, you will likely have a fairly limited catalogue of cars to choose from.
• Because of the current BiK tax rules, the scheme is skewed towards EVs. You can still get a conventional car, but then the tax benefits are close to null.

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The tax benefits of a salary sacrifice car scheme

You may gain exciting financial benefits if you sacrifice some of your salary for a car. But it is not a guarantee. Emissions matter in how the vehicle is taxed, meaning getting an EV on salary sacrifice is more likely to be a financial win.

How does tax work in a salary sacrifice car scheme?

Your employer reduces your salary to pay for the car. This means that you do not pay income tax or NIC (National Insurance Contributions) on the salary you forego. Your employer will pay NIC on the benefit instead.

You, the employee, will instead need to pay BiK (Benefit-in-Kind) tax based on the car's value. Your employer is responsible for working out the value of the benefit and for taking what you owe from your wages through PAYE.

It’s still a good idea to know how the car's value is determined, as it will dramatically affect the tax you pay for the benefit. More on that below.

Benefit-in-kind tax on salary sacrifice car schemes

When receiving a benefit in kind, such as a company car, you are taxed for the value of said benefit according to your tax bracket. But how exactly is the value of the vehicle determined?

How is the value of a salary sacrifice company car determined?

For tax purposes, the value of your salary sacrifice company car is whichever is higher between:

• The value of the sacrificed salary. 
• The result of calculations following the BiK rules. 

This is where the special rules for EVs come into play. If the car in question is a ULEV (Ultra Low Emissions Vehicle), the value of the benefit is determined by the BiK calculations, which is very likely to be less than your foregone salary, lowering your tax burden. More on that shortly.

How to calculate the value of the company car

The most important factors when determining the value of a company car are: 

• The CO2 emissions of the vehicle
• The list price of the car

The system further favours cars with low CO2 emissions by multiplying the car's list price with a percentage based on emissions to find the value of the benefit. In 2024, the rate is 2% for the cleanest cars and 37% for the most polluting category. 

Low emissions significantly reduce the value, which means less tax for you.

HMRC has made a calculator to help you determine the benefit-in-kind value of a company car. Fair warning: you might want to grab yourself a cup of tea before you begin.

If you want to dive deeper into how tax works on company cars, we have written an article on the topic:

Company Car Tax: What you need to know.

EVs are taxed differently in a salary sacrifice scheme

The rule that the benefit's value is, at minimum, equal to the value of your foregone salary was introduced in 2017. Interestingly, HMRC left ULEVs, vehicles that emit less than 75g of CO2 per km, out of the reform due to their wider societal benefits.

This makes electric cars an attractive option for a salary sacrifice car scheme, as they are still valued according to the BiK calculations, which already favour cleaner vehicles.  

Salary sacrifice for an EV can lower your income

This is a good thing. A salary sacrifice car scheme on an EV means that you forego more salary than the BiK value of the car. This might sound like a bad deal at first, but quite the contrary.

You pay BiK tax based on the value of the car, meaning that a low BiK value equals low tax. When calculating your income for tax purposes, the value of the benefit is added to your income. 

Example of how a salary sacrifice can affect your income: 

You make £40,000 per year. You sacrifice £700 per month towards a Tesla Model 3, bringing your income down to £31,600. Then, the value of the benefit is added, which in this case is just £1,200 per year. Your annual income is now £32,800.

Lowering your income means less progression towards higher income tax brackets. Put another way, it’s probably more tempting to sacrifice income that would have been taxed at 40% than at the 20% basic rate.

Some social programmes and tax exemptions also require you to meet a certain income threshold to qualify. For example, you stop being eligible for tax-free childcare if your income exceeds £100,000. 

While this will only be relevant in select cases, it’s worth being aware of.

Employer and wage decide if you can salary sacrifice for a car

Whether you can enrol is determined by two things: Your employer must have an agreement with a leasing company, and you must have enough salary to sacrifice.

Your employer must have a leasing agreement

A salary sacrifice car lease is a three-way agreement. You forego some salary, which your employer uses to pay a leasing agreement with a fleet provider.

This means that your employer must have, or be willing to make, such an arrangement with the third party. It also means that the car is tied to your job and that you must return it if your employment is terminated.

You must stay above the national minimum wage

So, how much salary can you sacrifice for a car? Legally, the only limit is that you must stay above the national minimum wage after the price of the agreement has been subtracted from your earnings.

So, are salary sacrifice car schemes worth it?

A salary sacrifice car scheme has its advantages and disadvantages. It's particularly advantageous for electric vehicles due to their favourable tax treatment. But the car will be tied to your employment, which might not be ideal for some people. 

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