How Employees Can Benefit From Salary Sacrifice For a Car
When considering a new car, the market can feel overwhelming - especially with the growing popularity of electric vehicles and the impending 2030 ban on petrol and diesel cars. Today, there are several ways to acquire a car, including leasing, purchasing, or, if your employer offers it, through a salary sacrifice scheme.
In this article, we will focus on how salary sacrifice works specifically for cars, exploring its benefits for both employees and employers and outlining what’s required to sign up.
How Does Salary Sacrifice Work?
As aforementioned, a salary sacrifice car scheme is a good way for companies to give their employees a benefit without taking on the cost. Salary sacrifice in the UK is an arrangement where employees agree to exchange part of their pre-taxed annual salary for a non-cash benefit. This can result in savings on both National Insurance contributions and income tax. Employers also benefit by saving on their own National Insurance contributions. Employees across the UK can salary sacrifice a range of benefits, like pension contributions, childcare vouchers, and even electric cars.
In the case of electric car salary sacrifice, the business provides the car for the employee who sacrifices part of their salary to cover the cost of the car. Employees save on National Insurance and income tax by opting for a salary sacrifice scheme.
How Does Salary Sacrifice Work For Employees?
When you join a company, your employer will provide a list of available benefits, and it’s up to you to decide which ones suit your needs. Salary sacrifice is an excellent way to save on National Insurance and Income Tax, as mentioned earlier. If you opt to lease a car through salary sacrifice, the payments are deducted from your gross salary (pre-tax), unlike traditional car leases where payments come from your net pay (post-tax).
As an employee, you can choose the vehicle that best fits your driving requirements. Each month, your salary will be reduced to account for the car. You can also bundle in options such as maintenance, breakdown cover, tyres, fully comprehensive insurance and even a home EV charger, allowing you to save on National Insurance and Income Tax for these additional services as well.
As An Employee, What Can You Do To Take Advantage Of a Car Scheme?
There are several ways you can take advantage of a salary sacrifice car scheme, such as:
Requesting The Scheme At Your Company
It may seem obvious, but as an employee, you can request that your employer offer a car scheme. This can be a valuable initiative for companies, as it boosts employee satisfaction and retention while incurring no cost to the business.
If your employer opts for a salary sacrifice scheme that includes electric vehicles (as many do), even better. An EV salary sacrifice scheme can specifically help the company meet its environmental, social, and governance (ESG) targets, while also contributing to a more attractive and sustainable workplace.
Choosing a Vehicle Through The Scheme
As an employee, the best way to benefit from a car scheme is to make use of it! You can select the car, the lease term, and the mileage, as well as decide whether to include maintenance, servicing, tyres, and MOT in the monthly payments. This is a great way to get into an electric car for less, which often has high upfront costs.
What Are The Benefits Of a Salary Sacrifice Car Scheme For Employees?
There are several benefits of using a salary sacrifice scheme from an employee’s point of view, here are a couple of examples:
Substantial Tax Savings
Payments come out of the employee's salary before tax is deducted, helping you save 30-60% (depending on the tacket they fall under) on the car and any extras included. Employees can choose the car they want, add on any extras and drive away saving thousands each month. For example, if an employee earns £70,000 per annum and chooses to lease a Tesla Model Y and has the potential to save £270 per month.
Access To a Wide Range Of Cars
Depending on the salary sacrifice provider your company have chosen, employees will have access to a range of cars so they can choose the one best suited to their needs. With electric car salary sacrifice in particular, this is very important as different models have different ranges and specifications.
Feel Supported And Valued In Their Role
The opportunity to use a salary sacrifice scheme can make existing employees feel valued, as having a brand-new car is a highly attractive benefit.
Reduce Your Carbon Footprint By Opting For An EV
One of the major benefits of a salary sacrifice car scheme is that by choosing an electric vehicle, employees can significantly reduce their carbon emissions, even just on their commute to work. Many people want to contribute to a greener planet, and switching to an electric car is one of the most effective ways to lower your carbon footprint.
Is Salary Sacrifice For Cars Worth It?
As mentioned earlier, salary sacrifice is a valuable benefit for both employees and employers. As an employee, you could save hundreds of pounds each month. The table below illustrates potential savings for an employee leasing an Audi Q4, assuming they are a 40% taxpayer, opting for a three-year lease, 10,000 miles per year, and a flat payment profile.
The monthly gross cost of the Audi Q4 is £727, but by using a salary sacrifice provider like The Electric Car Scheme, the employee can save £291 in income tax and £15 in National Insurance contributions. There is a small company car tax of £59. This brings the total cost of the Q4 to £481, down from £727 - a significant saving!
Salary Sacrifice vs Car Allowances
When considering salary sacrifice, employees should explore all available options, with car allowances being a popular alternative. A car allowance is a sum of money provided to employees by their employer to be used towards the cost of purchasing or leasing a vehicle. The employer covers the cost of using the vehicle for work-related purposes. Unlike salary sacrifice, a car allowance is added to the employee's salary and is subject to income tax and National Insurance contributions.
Below is a comparison between the two choices that should be carefully evaluated before making a significant financial decision, such as leasing an electric vehicle.
| Salary Sacrifice Benefits | Car Allowance Benefits | |
|---|---|---|
| Tax Efficiency: Salary sacrifice is a great way to save on income tax and NI, making the cost of an electric car more accessible. | Flexibility: Employees have the freedom to choose any vehicle and are not limited to a specific selection. | |
| Simplicity: The scheme provider and employer take most of the hassle out of leasing a car for the employee. Employees can also bundle everything (from a home charger to breakdown cover) into the monthly lease cost. | Control Over Costs: With a car allowance, employees can shop around for the best deals and manage their vehicle-related expenses. | |
| No individual credit checks: As the employer is leasing the vehicle, the employee is not subject to a check on their finance. | Additional Income: The allowance is added to the employee's salary, which can be advantageous for those who already own a vehicle or have lower transportation costs. |
How To Decide If Salary Sacrifice Is Right For You
Salary sacrifice is worth it for those who want to get a car and save on income tax and National Insurance. However, it is a financial agreement and there are some instances where it may not be right.
Salary sacrifice will be right for you if:
You want to save money: By paying for your lease through pre-tax income, you can reduce your income tax and National Insurance contributions.
You value convenience: With everything bundled into one monthly payment - such as maintenance, insurance, breakdown and insurance cover - it simplifies the overall car ownership experience.
You have stable employment: Salary sacrifice agreements are long-term commitments (usually 2-3 years), so it’s ideal if you feel secure in your job and earn above the National Minimum Wage!
You’re interested in an electric vehicle: With lower Benefit-in-Kind tax rates for EVs, the savings are even greater, making this an affordable way to transition to electric driving.
Salary sacrifice may not be suitable for employees earning less than the minimum wage or those with variable pay. It’s important to ensure you can afford the monthly payments for the car. Additionally, you should consider whether you expect to remain with the company for the duration of the lease—if not, committing to a salary sacrifice car scheme may not be the best option.
The Electric Car Scheme is an easier and hassle-free way of offering salary sacrifice electric cars to employees. The salary sacrifice company you choose should ensure there is no significant risk in the way the scheme is set up. They should also help you with reporting, benefit calculations, HMRC reporting, accounting and payroll instructions.
How Does Salary Sacrifice Work For Employers?
Many employers assume setting up a salary sacrifice scheme for cars involves a lot of work or a high amount of risk, but with The Electric Car Scheme, this isn’t the case. As an employer, here’s what you can expect if you sign up to The Electric Car Scheme as your provider:
Register your interest and talk with one of our product specialists to understand how this would work in your business.
One of our product specialists will handle the scheme set-up and launch, ensuring a hassle-free process for you.
Then, we will assign a dedicated Customer Success Manager to support your business with the launch of the scheme - this includes employee webinars, demo days, promotions and more.
Once your scheme is launched, our EV Specialist and Customer Success Teams will regularly be in touch to ensure your scheme is an ongoing success.
Our pricing is based on data collected from The Electric Car Scheme quote tool. All final pricing is inclusive of VAT. All prices above are based on the following lease terms; 10,000 miles pa, 36 months, and are inclusive of Maintenance and Breakdown Cover. The Electric Car Scheme’s terms and conditions apply. All deals are subject to credit approval and availability. All deals are subject to excess mileage and damage charges. Prices are calculated based on the following tax saving assumptions; England & Wales, 40% tax rate. The above prices were calculated using a flat payment profile. The Electric Car Scheme Limited provides services for the administration of your salary sacrifice employee benefits. The Electric Car Scheme Holdings Limited is a member of the BVRLA (10608), is authorised and regulated by the FCA under FRN 968270, is an Appointed Representative of Marshall Management Services Ltd under FRN 667174, and is a credit broker and not a lender or insurance provider.
Last updated: 27/09/24
