Complete Guide to Salary Sacrifice for Cars

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 reduce 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 reduces 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 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 reduces 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. 

Considerations

Employers and employees should consider several factors before entering into a car salary sacrifice scheme.

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:

• 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.
• 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.
• 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.
• 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:

• 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 be unsuitable for employees with low salaries or high personal tax allowances. 
• 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.
• 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.
• 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 particularly benefit 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, reducing take-home pay may only suit 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.