Salary Sacrifice And Car Allowance: How Best To Help Your Employees
One of the best ways to attract and retain talent is to offer a company car allowance or salary scheme. In recent years, car allowance vs salary sacrifice has become a key consideration for businesses, with many opting for car allowances due to the reduced administration and risk. Whilst this is brilliant for the business, often, employees receive less value since a [car allowance taxable] benefit is subject to standard deductions.
Combining salary sacrifice and a company car allowance allows employees to maximise their allowance by using it before taxation, making it a great employee benefit to boost retention and your company's ESG goals. In this blog, we aim to understand the intricacies of salary sacrifice and car allowances, exploring how they work and how they can be used together.
Understanding Electric Car Salary Sacrifice
Salary sacrifice, often referred to as a 'salary exchange', is a financial arrangement where an employee agrees to give up part of their pre-tax salary in exchange for a non-cash benefit – in this case, an electric vehicle. Electric car salary sacrifice schemes are gaining popularity because it is a cost-effective way for employees to drive a new EV while also reducing their income tax and National Insurance contributions.
How Does Salary Sacrifice Work?
You may be wondering, how does salary sacrifice work? The process of electric car salary sacrifice is straightforward. An employee selects an electric vehicle within a set budget, and the employer leases the car on their behalf. The lease cost is then deducted from the employee's gross salary, lowering their taxable income. This arrangement can lead to significant savings for both the employee and employer, as it reduces the amount of tax and National Insurance that needs to be paid.
This is appealing because of the low Benefit-in-kind (BiK) tax rates for electric vehicles. This means employees can enjoy driving a new EV at a reduced overall cost compared to traditional car leases or purchases. This differs from a traditional car allowance in salary where the amount is added to your paycheck and then taxed.
Car Allowance: What Is It And How Does lt Work?
A car allowance salary package is a company benefit where employers provide employees with a monetary sum instead of a company-owned vehicle. This car allowance in salary usually ranges from £3,600 to £10,300 annually in the UK (approximately £380-£860 monthly). This allowance is added to the employee's salary and is subject to income tax and National Insurance contributions. Unlike salary sacrifice, the car allowance taxable amount is added to the employee's salary and is subject to income tax and National Insurance contributions. This means car allowances are taxable. Your company car allowance often varies based on seniority and job requirements, with more senior positions typically receiving higher allowances.
The allowance is designed to cover various vehicle-related expenses, including fuel, insurance, maintenance, and repairs, as well as compensating for wear and tear from business travel. One key advantage is the flexibility it offers – employees can choose their preferred vehicle and negotiate their own lease or purchase terms, rather than being restricted to specific options as with salary sacrifice schemes. They can also retain ownership of the vehicle even after leaving the company, making it an attractive option for both employers and employees who value freedom of choice in their vehicle decisions.
Comparing The Benefits: Salary Sacrifice Vs Car Allowances
When comparing car allowance and salary sacrifice, several factors come into play. While car allowance vs salary sacrifice decisions often focus on tax implications, it's important to consider both short-term savings and long-term flexibility. A company car allowance offers more freedom in vehicle choice, but salary sacrifice typically provides better tax efficiency.
Salary Sacrifice Benefits
Unlike a car allowance taxable benefit, salary sacrifice reduces the employee's taxable income, leading to savings on income tax and National Insurance. Here are some benefits of EV salary sacrifice schemes:
Tax Efficiency: Salary sacrifice reduces the employee's taxable income, leading to savings on income tax and National Insurance.
Simplicity: Salary sacrifice schemes mean that the scheme provider and employer take most of the hassle out of leasing a car.
No individual credit checks: As the employer is leasing the vehicle, the employee is not subject to an individual credit check on their finance.
Inclusive Packages: Many salary sacrifice schemes include insurance, maintenance, and breakdown cover, simplifying the process for employees
Car Allowance Benefits
Car allowance salary package advantages:
Flexibility: Employees have the freedom to choose any vehicle and are not limited to a specific selection.
Control Over Costs: With a car allowance, employees can shop around for the best deals and manage their vehicle-related expenses.
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.
Potential Drawbacks: Salary Sacrifice Vs Company Car Allowances
While both options have their merits, there are potential drawbacks that businesses and employees should consider:
Salary Sacrifice Drawbacks
Contractual Commitment: Unlike a car allowance salary package, employees are typically locked into a lease contract for a set period, which may not suit everyone.
Impact on Other Benefits: The reduced gross salary could affect mortgage applications and other benefits calculated based on income. It is important to note that this is the case for all car leases.
Car Allowance Drawbacks
Tax Implications: Since the car allowance is taxable, the net benefit might be less than initially perceived.
Administrative Burden: Unlike salary sacrifice, with car allowance in salary arrangements, employees are responsible for managing all aspects of vehicle ownership.
Which Is The Right Option For You?
When deciding between a company car allowance and salary sacrifice, consider your long-term goals. It’s important to remember that salary sacrifice offers tax advantages but less flexibility, while a car allowance in salary provides more freedom but higher tax implications.
| Choose Electric Car Salary Sacrifice When.... | Choose Company Car Allowance When... |
|---|---|
| You want to reduce your taxable income through NI and income tax savings | You want complete flexibility in choosing and owning your vehicle |
| You're interestesd in an all-inclusive package (maintenance, insurance, servicing, and home charger installation) | You prefer to manage your own vehicle expenses and arrangements |
| You're comfortable with a lease arrangement and specified mileage limits | You want the ability to sell the vehicle when you choose |
| You want to support sustainable transportation options, if you're choosing an EV salary sacrifice lease | You need to exceed standard lease mileage limits |
| You don't need to undergo individual credit checks | You want to keep the car if you leave the company |
| You want lower monthly costs through tax savings | You prefer to have the allowance as additional income despite the tax implications |
| You're happy to choose from a specific range of vehicles | You want unrestricted choice in the vehicle make, model, and fuel type |
| You want all costs bundled into one monthly payment | You prefer to shop around for insurance and maintenance deals |
Making The Right Choice: Your Business & Employees
When considering vehicle benefits, companies need to weigh the advantages of both salary sacrifice schemes and car allowances to determine the best fit for their workforce.
While car allowances offer greater flexibility in vehicle choice and ownership, they come with the drawback of being subject to both income tax and National Insurance contributions, resulting in higher costs for employers and employees alike.
In contrast, salary sacrifice schemes for vehicles, particularly electric ones, can provide significant tax savings through reduced taxable income, though they typically offer a more limited range of vehicle choices and lease-only options.
The choice between car allowance and salary sacrifice doesn't have to be either/or. Many organisations are now offering both options, allowing employees to choose between the freedom of a car allowance taxable benefit or the tax efficiency of salary sacrifice. This flexible approach to car allowance vs salary sacrifice ensures that businesses can meet diverse employee needs while potentially supporting their sustainability objectives through EV options.
For many organisations, the ideal solution may be implementing both options simultaneously - allowing employees to choose between the freedom of a car allowance or the tax benefits of salary sacrifice based on their individual preferences and circumstances. This dual approach enables businesses to cater to diverse employee needs while potentially supporting their sustainability objectives through EV options. The key is understanding how your car allowance salary package or salary sacrifice arrangement aligns with both your personal circumstances and your company's goals.
Electric Car Salary Sacrifice And The Electric Car Scheme
Every company in the UK can help their employees on their journey to net zero by offering The Electric Car Scheme as an employee benefit. With The Electric Car Scheme, employers can offer a tax-efficient alternative to traditional company car allowance arrangements. Salary sacrifice allows employees to save up to 60% when leasing any electric car of their choice; they simply agree to have a portion of their pre-tax salary deducted each month to cover the cost. As an employee you choose the car you want, add on any extras and drive away saving thousands! This enables employees to save on the upfront cost of electric cars since leasing involves no initial expenses. Consequently, more individuals can afford to drive electric vehicles, as the price is no longer a barrier impeding accessibility.
Last updated: 15.01.25
