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What is A Salary Sacrifice Car?

By Tom Gibson | November 19, 2021


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Find out what a salary sacrifice car scheme is, as well as if they are still worth it in 2021

What is A Salary Sacrifice Car?

What is a salary sacrifice car?

A salary sacrifice car is a neutral cost option for companies who want to offer their employees a car.

Salary sacrifice schemes are common place in the working world and are regularly used by employers as incentives to attract and retain the best talent in their industry. The schemes themselves involve trading a percentage of an employee’s pre-taxed salary in return for goods or services. In this case, a car would fall in the goods category.

In addition to cars however, employers can also offer gym memberships, childcare, healthcare, or even increased pension contributions – among other things – on a salary sacrifice basis.

As a result of the sacrificed amount being deducted from employee’s pre-taxed salary, therefore lessening the taxable income of that employee, salary sacrifice schemes are attractive as they ultimately save the employee money in the long-term.

The salary sacrifice car scheme itself has been subject to changes in tax recently, so in this article, we’ll take a look to see if a salary sacrifice car scheme is still worth it for both employers and employees.

How do salary sacrifice car schemes work?

The employee finances the car through payroll deductions in order to take advantage of the employer's right to deduct VAT and reduced social security contributions. This leads to cost savings for the employee over time while the employer is positioned as a more attractive proposition.

It’s worth noting that a salary sacrifice car is not the same as a company car or benefit car. The salary sacrifice car is used as a private car, but is leased by the employer, usually for 36 months.

What were the 2017 tax changes?

In 2017, there were changes to the salary sacrifice car scheme that meant the employee is now required to pay income tax on either the value of the car or the amount of salary sacrificed.

Any salary sacrifice car agreement which precedes the change in tax rules remains exempt from income tax until 2021.

However, although there is often confusion surrounding these changes, with many believing that 2021 signifies the death of salary sacrifice car schemes, we do not believe this is the case and there are certainly still major benefits.

Is a salary sacrifice car worth it?

Despite salary sacrifice schemes now having the addition of income tax, there are still many benefits which make leasing a car via your employer a beneficial option for any employee, such as...

Better priced cars

It’s commonplace for companies to be able to purchase cars at a lower price than what’s available to individual consumers on the forecourt. This means that leasing a car from your employer can often be much cheaper than buying directly from a car dealer.

No deposit required

It is unlikely that you will need to pay a deposit when buying a car via your employer. Again this can lead to both cost and time savings.

A level playing field amongst employees

For an employer, offering a salary sacrifice car scheme can help alleviate some hierarchal issues by offering car ownership at virtually every level throughout the company, rather than only accepting senior figures. This helps to promote fairness and alleviate the hierarchy.

All-inclusive car packages

This is a big one. Everyone hates car maintenance and many salary sacrifice schemes have all-inclusive packages that mean the essential extras are all looked after – at no additional cost. Elements such as road tax, insurance, breakdown cover, servicing and maintenance as well ass all of the hassle, organisation and effort that comes with buying a car, and then ensuring it remains roadworthy, is a taken from you and is dealt with by your employer.

Remaining tax advantages for ULEVs

Although the tax benefits of salary sacrifice car schemes have lessened considerably since the rule changes in 2017, there is still a way to avoid paying tax on the salary sacrifice car or the exchanged salary through environmentally friendly cars.

Ultra Low Emission Vehicles (ULEVs) – cars emitting 75g/km CO2 or less – are eligible to purchase on a salary sacrifice basis and are exempt from the new tax rules in the hope to reduce CO2 emissions on UK roads.

Moving to a less environmentally damaging car will, therefore, not only reduce yours and your company’s carbon footprint, but can also save you even more money on a salary sacrifice car scheme.

Is salary sacrifice worth it?

Although salary sacrifice car schemes are not as lucrative to an employee as they once were, there is no doubt that they are a great incentive for an employer to offer and they continue to be popular here in the UK.

In 2021, these schemes are still capable of saving the employee money, time and not to mention the stresses that often come with car ownership. Having your employer manage the logistics of car ownership can take the weight from your shoulders when managing a vehicle.

With the additional incentive of encouraging the use of more hybrid and electric cars to further reduce costs for the employee there are very few negatives to operating or participating in a salary sacrifice car scheme.

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