The Difference Between Salary Sacrifice and Car Leasing?
If you're considering switching to an electric car, you might be weighing the benefits of an electric car salary sacrifice versus car leasing. Both options have their advantages depending on your circumstances.
To help you make an informed decision, we've outlined the key differences and similarities between the two.
What is car leasing?
Car leasing allows you to drive a brand-new car without the commitment of purchasing it outright. When you lease a car, you essentially agree to rent it from the leasing company for a predetermined period, usually ranging from 2 to 4 years. During this time, you make monthly payments based on the car's depreciation over the lease term, as well as any associated fees or interest. These payments are made using your post-tax (or net) income, meaning the money you have left after taxes is deducted from your salary.
At the end of the lease term, you typically have a few options: you can return the car to the leasing company, choose to lease another new car, or in some cases, purchase the car at its residual value. Leasing can be an attractive option for those who enjoy driving the latest models without the long-term commitment of ownership, but it's important to be aware of any mileage limits or potential charges for excessive wear and tear on the vehicle when the lease ends.
What is electric car salary sacrifice?
Electric car salary sacrifice is an employee benefit introduced by the UK government to encourage more people to switch to electric vehicles, aligning with the nation's goal of achieving net zero emissions by 2050. This scheme allows employees to lease an electric car by sacrificing a portion of their pre-tax salary, which reduces their taxable income and, consequently, the amount of tax they pay.
Through salary sacrifice, employees can enjoy significant savings on the cost of an electric vehicle compared to traditional leasing or purchasing. The scheme often includes additional benefits, such as maintenance, insurance, and breakdown cover, all bundled into the monthly payment. By making it more affordable and accessible to drive electric, the salary sacrifice scheme plays a crucial role in helping the UK transition to greener transportation and reduce its overall carbon footprint.
What is the main difference between car leasing and EV salary sacrifice?
The primary difference between traditional car leasing and an electric car salary sacrifice scheme lies in how the monthly payments are handled. With a salary sacrifice scheme, your fixed monthly payments are deducted directly from your pre-tax salary, meaning before income tax or National Insurance contributions are applied. This can lead to substantial tax savings compared to paying for a car lease with your post-tax income.
Since this is an employee benefit, the vehicle is considered a "company car," and as such, it is subject to company car tax. However, the tax you pay on this "benefit-in-kind" (BIK) is determined by HMRC and is currently set at very low rates for electric vehicles, making it an attractive option. These favourable BIK rates are locked in until at least 2028, ensuring that drivers can continue to enjoy these savings for the foreseeable future. This makes the salary sacrifice scheme not only a cost-effective way to drive an electric car but also a smart choice for those looking to minimize their tax liabilities while contributing to environmental sustainability.
Here are the main differences between the two:
Ownership
When you lease a car, you're essentially renting it for an agreed period. However, with The Electric Car Scheme, the company leases the car on your behalf, making it a company car. In both cases, you don't own the car, although you may have the option to purchase it at the end of the lease, depending on various factors.
Upfront costs
These terms depend on the leasing company, but car leases typically require a deposit along with other fees. In contrast, The Electric Car Scheme does not require any upfront costs—the amount on your payment plan is exactly what you pay.
Maintenance costs
With car leases, the leasing company is usually responsible for all maintenance and repairs. However, with a salary sacrifice scheme, costs such as home chargers and maintenance can be added to the plan, or you can choose to manage these expenses yourself.
Length of agreement
In this regard, the agreements for both car leasing and salary sacrifice are quite similar. Car leasing typically lasts between 2 to 4 years, and with The Electric Car Scheme, the term is also between 2 to 4 years. However, there is an additional option of car subscriptions, allowing you to have a car for as little as 12 months
End of the agreement
With both options, the end of the agreement is also the same - you are required to return the car at the end of the lease.
Before deciding between car leasing and an electric car salary sacrifice scheme, it’s crucial to consider your long-term goals, income, and current circumstances. Your decision should align with your financial situation and plans. For example, our market-leading Complete Risk Protection safeguards you from unexpected life changes such as family leave, dismissal, or sick leave, starting from day one. This coverage ensures that you won’t be left with financial burdens if your situation changes.
However, if you’re contemplating significant changes soon, such as resigning within the first three months of starting the scheme, a traditional car lease might be a more flexible option. Leasing offers more short-term flexibility, allowing you to adapt to changes without the same level of commitment required by a salary sacrifice scheme. Understanding these aspects will help you make the best choice for your unique situation.
Last updated: 09/08/24
