Complete Guide to Salary Sacrifice for Cars.

How it Works, Benefits, and Disadvantages. 

Car salary sacrifice is an employee benefits scheme that allows employees to lease a car using their pre-tax income. In this scheme, the employer leases the car on behalf of the employee, and the employee repays the lease payments from their pre-tax salary. The method provides a tax-efficient way of leasing a car, and the employer and employee can benefit from the arrangement.

How does it work?

In a car salary sacrifice scheme, the employer leases a car on behalf of the employee. The employee then agrees to repay the lease payments from their pre-tax salary over a while, usually 2-4 years. The costs are made through a salary sacrifice arrangement, which means that the amount of the lease payments reduces the employee's salary before tax is calculated.

The car is usually leased through a specialist leasing company, and the lease costs include insurance, maintenance, and other running costs. The employee is responsible for fuel costs and any excess charges for damage or repairs.

At the end of the lease period, the employee can either return the car or purchase it for a pre-agreed amount.

Benefits to the employee

Car salary sacrifice can be an attractive employee benefit. It allows employees to lease a car at a lower cost than they could achieve on their own. The scheme provides a tax-efficient way of leasing a vehicle, as the lease payments are deducted from the employee's pre-tax salary. This means that the employee pays less tax overall, as the amount of the lease payments reduce their taxable income.

In addition, as the car is leased through a specialist leasing company, the employee benefits from fixed insurance, maintenance, and other running costs. This provides the employee certainty and peace of mind, as they know exactly how much their car will cost each month.

Finally, the car is leased in the employer's name, which means the employee does not have to worry about the hassle of selling the vehicle at the end of the lease period. The employee can return the car to the leasing company and choose a new one if they wish to continue the scheme.

Benefits to the employer

Car salary sacrifice can also benefit employers, as it provides an attractive employee benefit that can help attract and retain staff. The scheme can also help reduce the employer's National Insurance contributions, as the lease payments lessen the employee's salary.

In addition, the employer benefits from reduced administration costs, as the specialist leasing company handles all aspects of the lease, including insurance, maintenance, and repairs. This means that the employer does not have to worry about the administrative burden of managing a company car fleet.

Finally, the scheme can help to reduce the environmental impact of the employer's fleet, as employees are incentivised to choose more fuel-efficient cars. This can help the employer to meet its environmental targets and reduce its carbon footprint.

Considerations

Before entering into a car salary sacrifice scheme, employers and employees should consider several factors.

Firstly, the employee should ensure that they can afford the lease payments for the lease period. As the costs are deducted from their pre-tax salary, they should ensure their post-tax income is sufficient to meet their living expenses. Estimating income tax can also be helpful. 

Secondly, the employee should ensure that they choose a car that meets their needs and budget. The vehicle should be fuel-efficient, reliable, and within the employee's budget.

Thirdly, the employer should ensure the scheme is set up correctly, with appropriate legal and tax advice. The method should comply with all relevant legislation, including the Finance Act 2017 and the Income Tax (Earnings and Pensions) Act 2003.

Finally, the employer should ensure that the scheme is communicated effectively to employees and that employees understand the terms and conditions of the scheme. Clear communication helps avoid misunderstandings or disputes later on.

Car salary sacrifice schemes may not be suitable for all employees. For example, employees with low salaries or high personal tax allowances may benefit from the scheme less than higher earners. Additionally, employees with a company car or who travel primarily for business purposes may not require the scheme.

Car salary sacrifice the pros and cons

Pros:

1. Tax efficiency: The car salary sacrifice scheme provides a tax-efficient way of leasing a car, as the lease payments are deducted from the employee's pre-tax salary. This can result in lower taxable income and a reduced employee's overall tax bill.
2. Attractive employee benefit: Car salary sacrifice schemes can be an attractive employee benefit that can help to attract and retain staff. The scheme provides a cost-effective way of leasing a car, which can be particularly appealing to employees who may not otherwise be able to afford a car.
3. Reduced administrative burden: The scheme can reduce the administrative burden for employers, as the specialist leasing company handles all aspects of the lease, including insurance, maintenance, and repairs. This can save time and resources for the employer.
4. Environmental benefits: Car salary sacrifice schemes can incentivise employees to choose more fuel-efficient cars, which can help to reduce the environmental impact of the employer's fleet.

Cons:

1. Reduced take-home pay: While the car salary sacrifice scheme can provide tax savings, it also reduces the employee's income. It's also worth seeing what your tax allowance is. This may not be suitable for employees with low salaries or high personal tax allowances. 
2. Limited flexibility: The scheme can be inflexible, as the employee is committed to making lease payments for the lease period. This can be a disadvantage if the employee's circumstances change and they no longer require the car.
3. Potential for unexpected costs: While the lease payments include insurance, maintenance, and other running costs, the employee is still responsible for fuel and any excess charges for damage or repairs. This can result in unexpected costs for the employee.
4. Legal and tax implications: The scheme should comply with all relevant legislation, including the Finance Act 2017 and the Income Tax (Earnings and Pensions) Act 2003. Employers and employees should seek legal and tax advice to ensure the scheme is set up correctly and complies with all relevant legislation.

Is salary sacrifice a benefit to directors?

Yes, salary sacrifice can be a benefit to directors in certain circumstances. Directors are typically employees of their limited company and may be eligible to participate in a car salary sacrifice scheme.

One of the main advantages for directors is the tax efficiency of the scheme. By sacrificing part of their salary to lease a car, directors can reduce their taxable income and lower their tax bill. This can be particularly beneficial for higher earners subject to higher income tax rates.

In addition, the car salary sacrifice scheme can be an attractive employee benefit that can help to attract and retain directors. The scheme can demonstrate the company's commitment to supporting its employees and their needs by providing a cost-effective way of leasing a car.

However, it is essential for directors to carefully consider the potential drawbacks of the scheme before entering into it. As with all salary sacrifice schemes, the reduction in take-home pay may only be suitable for some directors, particularly those with low salaries or high personal tax allowances.

Furthermore, directors should seek legal and tax advice to ensure the scheme complies with all relevant legislation, including the Finance Act 2017 and the Income Tax (Earnings and Pensions) Act 2003. Failure to comply with these regulations can result in significant financial penalties and legal consequences.

Frequently asked questions

1) How does salary sacrifice work for cars?

Salary sacrifice for cars is a scheme that allows employees to lease a vehicle using their pre-tax salary. The employer sets up the scheme with a specialist leasing company, which provides the car and manages all aspects of the lease, including insurance, maintenance, and repairs. In essence, the employee agrees to sacrifice a portion of their salary to use a car.

The employee typically chooses the car they wish to lease from a range of options provided by the leasing company. The lease payments are deducted from the employee's pre-tax salary, which reduces their taxable income and overall tax bill. At the end of the lease period, the employee can either return the car or enter into a new lease agreement.

2) Is the salary sacrifice worth it?

Whether salary sacrifice is worth it depends on the individual circumstances of the employee and employer. Salary sacrifice can provide tax savings and be an attractive employee benefit. Still, it also reduces the employee's take-home pay and may be inflexible.

Employers and employees should carefully consider the scheme's potential advantages and disadvantages before entering it. Factors such as the cost of the car, the employee's salary, and the employer's budget and resources should be considered when deciding whether salary sacrifice is worth it.

Ultimately, with the right approach and careful planning.

3) Is salary sacrifice better than a company car?

Whether salary sacrifice is better than a company car depends on the individual circumstances of the employee and employer.

A company car is a vehicle that is owned and provided by the employer for the employee's use. The employee may be responsible for some costs, such as fuel and maintenance. Still, the employer is typically responsible for most running costs, including insurance and repairs.

Salary sacrifice allows the employee to lease a car using their pre-tax salary. The employee is responsible for the lease payments and some running costs, such as fuel. Still, the employer may be responsible for the maintenance and repairs.

One potential advantage of salary sacrifice is that it can provide tax savings for the employee, as the lease payments are deducted from their pre-tax salary. However, the reduction in take-home pay may only be suitable for some employees, particularly those with low wages or high personal tax allowances.

Ultimately, whether salary sacrifice is better than a company car depends on the specific needs and circumstances of the employee and employer. Factors such as the cost of the vehicle, the employee's salary, and the employer's budget and resources should be considered when deciding which option is best.

There are several potential disadvantages to the salary sacrifice car scheme that employees and employers should consider before entering into the scheme. These include:

What are the disadvantages of the salary sacrifice car scheme?

• Reduced take-home pay: While the scheme can provide tax savings, it also reduces the employee's take-home pay. This may not be suitable for employees who have a low salary or who have high personal tax allowances.

• Limited flexibility: The scheme can be inflexible, as the employee is committed to making lease payments for the duration of the lease period. This can be a disadvantage if the employee's circumstances change and they no longer require the car.

• Potential for unexpected costs: While the lease payments include insurance, maintenance, and other running costs, the employee is still responsible for fuel costs and any excess charges for damage or repairs. This can result in unexpected costs for the employee.

• Legal and tax implications: The scheme should comply with all relevant legislation, including the Finance Act 2017 and the Income Tax (Earnings and Pensions) Act 2003. Employers and employees should seek appropriate legal and tax advice to ensure that the scheme is set up correctly and complies with all relevant legislation.

In summary;

Car salary sacrifice schemes can be a valuable employee benefit that provides a tax-efficient way of leasing a car. The scheme benefits employees and employers with lower costs, reduced administrative burdens, and potential environmental benefits. With the right approach and careful planning, car salary sacrifice can be a win-win situation for employees and employers. However, before entering into a car salary sacrifice scheme, both parties should consider various factors to ensure the scheme is appropriate for their needs and circumstances.

Pros and cons summary

While the car salary sacrifice scheme can provide an attractive employee benefit and reduce administrative burdens for employers, it is essential to consider the potential drawbacks and seek appropriate legal and tax advice before entering the scheme. With the right approach and careful planning, car salary sacrifice can be a win-win situation for employees and employers.

Benefit to directors in summary.

While car salary sacrifice can benefit directors, it is essential for them to carefully consider the potential advantages and disadvantages of the scheme and seek appropriate legal and tax advice before entering into it. With the right approach and careful planning, car salary sacrifice can be tax-efficient for directors to lease a car and demonstrate their company's commitment to supporting their employees.

Overall, 

Salary sacrifice for cars can be a valuable employee benefit, providing tax savings and access to a new vehicle at a lower cost than traditional leasing options. However, it's essential to carefully consider the potential disadvantages and seek appropriate advice before entering into the scheme. Ultimately, whether salary sacrifice is worth it depends on the individual circumstances of the employee and employer. Careful planning and consideration should be taken to ensure the scheme is set up most effectively.

To find out how Silverstone Leasing can save money and look after your fleet, please call us today on 01604 978480. Click here for some examples of our salary sacrifice