Employees continue to look for better benefit packages from potential employers; a decent salary is no longer enough. A lot of these additional benefits are offered via salary sacrifice schemes. A salary sacrifice scheme allows you to pay for things before your pay is taxed, which means that you pay less income tax and NI contributions because it reduces your taxable salary. There are a number of different salary sacrifice options available, from childcare vouchers to bikes to pensions; however, in this article, we will be focusing on cars. Let’s get into it.
Defining A Salary Sacrifice Car Scheme
A salary sacrifice car scheme is akin to leasing a car. The biggest difference is that the third-party supplier has partnered with your employer as opposed to entering into an agreement with you outside of work. The cost of the car is deducted immediately from your pay each month before your pay gets taxed.
You would be forgiven for wondering whether this is essentially like receiving a company car, but it is, in fact, different. When you receive a company car, the business pays for it, and they retain control, perhaps implanting rules for its use, and you do not own the car. With a salary-sacrifice car, you are leasing to own it, it is your responsibility, and you can choose how and when to use the vehicle.
Electric Vehicles
In the 2020 budget announcement, electric cars were the most beneficial car to obtain via a salary sacrifice scheme because they incurred no benefit in kind tax for the 2020/2021 tax year. However, this has since increased; in the tax year 2021/2022, they were taxed at 1% and in the tax year 2022/2023, this rose again to 2%, which is set to hold steady until at least the tax year 2024/2025. This does mean that they are still a great option for drivers.
Plug-in hybrids also benefit from lower benefit-in-kind rates than traditional fuel vehicles. There are other benefits to purchasing an electric vehicle outside of this, in that they are better for the environment, and the government does plan to ban the sale of new traditional fuel vehicles in the next decade. LV ElectriX has a great resource on salary sacrifice scheme packages and how they pertain to electric vehicles.
The Benefits of a Salary Sacrifice Car Scheme
Arguably, the biggest benefit of a salary sacrifice car scheme is that employees are able to get a new car that they probably would not be able to afford otherwise. The cars that you can get through salary sacrifice schemes do range, but, by and large, you do tend to be able to get a newer car. Depending on the scheme, you might also be eligible for a manufacturer’s warranty, and newer cars also tend to be cheaper to run as well as being generally safer and more reliable too.
Obviously, you will also need to look into your business’s policies and approach to their scheme, but you might also find that within the monthly payments, there are other things included, like the cost of maintenance, insurance and breakdown cover. This means that you might only have to pay for the fuel going forward, which does make things easier. You should then think about cars with the lowest running costs to make sure that the only other costs going forward are as low as possible.
The Drawbacks to a Salary Sacrifice Car Scheme
While a salary sacrifice scheme does indeed reduce your taxable income and can save you money in that respect, when choosing to pay for a car through a salary sacrifice scheme, you are subject to benefits in kind tax. This can mean, depending on the car that you choose, you could be subject to higher taxes than you would if you chose to fund one yourself outside of a salary sacrifice schemes. On the other hand, cars with lower emissions can be more cost-effective for benefits in kind taxes.
After you have entered into a salary sacrifice agreement, you are also locked in until the end of the contract. This is unless, of course, you leave the job; however, if you do choose to leave before the end of the contract, you need to give the car back because it is subject to your salary given through that business. Your net salary is also lower, which can impact your ability to secure a mortgage or your credit score. Finally, depending on the agreement, once the contract is ended, you might need to give the car back at the end, enter into a new agreement or purchase the vehicle.
The Bottom Line
If you are trying to work out whether or not a salary sacrifice vehicle is right for you, then there are a few things that you will need to keep in mind. You should first look at the scheme that your employer offers and what it entails in terms of the commitment needed from you. After that, you will really need to think about your finances and whether or not you are going to be able to afford it. You obviously need to make sure that it makes sense for you to enrol yourself in the scheme.
