What is a salary sacrifice scheme and should you use it to run a car?

Tristan Young

25 Nov 2021

Due to some amazing tax-breaks businesses are increasingly offering workers cars through salary sacrifice schemes. Are they too good to be true, or should you dive in as soon as possible?

Salary sacrifice, as an idea, has been around for years and is used by businesses to offer low-cost perks to workers.

The idea goes; you buy or lease for something using money from your pay-packet before tax is deducted and before it reaches your bank account. A salary sacrifice scheme has to set up by an employer and because of this it can mean discounts due to a company having a greater purchasing, or discounting, power than an individual.

It’s used for all sorts of incentives such as childcare vouchers, bikes, pensions and, of course, cars.

Because we’re talking about cars that are being provided by a company, they do attract company car tax, even if running a car this way is entirely voluntary and not your typical company car. For a petrol or diesel this company car tax element would be enough to counter any savings, however, pick an electric car and the tax rate is tiny because the government wants to promote EVs and get as many people into them as soon as possible.

EV sweet spot

As a result, EVs have found themselves in a sweet spot when it comes to tax breaks and salary sacrifice.

Alongside the 20% or 40% saving in income tax, the company also saves money because it isn’t paying National Insurance on the sacrificed pay. Some companies can then pass this saving onto the worker further lowering the monthly cost of the car.

Total these deductions and the savings can be more than a third for a 20% tax band employee and nearing half for a 40% tax payer. When you consider that a typical EV can have a monthly lease cost of around £600, saving £200 or £300 a month, suddenly makes EVs look very attractive.

“Salary sacrifice is making electric vehicles affordable for the masses, particularly drivers who cannot afford to drive electric through other retail products,” claims Paul Gilshan, CEO of market leading salary sacrifice provider Tusker.

“It is therefore a great contributor to the electric uptake,” he adds.

If it’s so attractive, why aren’t more employees being offered it by their company?

One reason is that tax on company cars can, and does, change year-to-year. Should the Chancellor change company car tax bands to hit EVs more heavily then the savings could diminish.

However, Richard Cox, senior consultant in charge of salary sacrifice schemes at company car giant Arval, points out: “The government's committed to maintaining the low tax cost for EVs, at least until March 2025. Right now, that tax treatment means that the salary sacrifice scheme for electric vehicles specifically is extremely attractive.”

Do they work for everyone?

Salary sacrifice isn’t a free-for-all, there are regulations governing who can and can’t have one particularly around minimum pay. For instance salary sacrifice isn’t allowed to push anyone below minimum wage, so they don’t work well if you’re on or just above that threshold.

Even well above the minimum pay point, there are also some people is suits more and some it suits less.

If you frequently change job or are expecting to leave your job in a few months then the admin and potential early termination penalties mean such a scheme may not be for you – even if there is insurance in place to cover the early termination fee.

In other words, you need to weigh up the length of the lease (usually three years) against how long you’re likely to work for the same company before choosing a car this way.

In fact, most business that offer a salary sacrifice scheme will probably put their own ‘safety’ measures in place such as only allowing staff to take part in a salary sacrifice scheme once they’ve passed their probationary period because the risk of early termination is higher for them.

Other factors

With salary sacrifice schemes really only offering electric car at competitive rates, the other factor you’ll need to consider is how you’ll charge your new car.

Employers aren’t obliged to offer charging or install a charge point at your house, so that part will be up to you.

At this point you’re then into the wider argument about how an electric car would fit with your life.

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Tristan Young

25 Nov 2021