How does salary sacrifice work for a car?

How does salary sacrifice work for a car?

Posted by

Charlie Strand

April 2024

Salary sacrifice for a car is exactly the same as any other employee benefit. You exchange some of your salary for a benefit: gym membership; daycare nursery vouchers;  technology equipment; and so on.

You could buy any of these items with your take home salary, of course.

But the advantage of salary sacrifice is that you pay for these items with your gross salary – that’s the amount before tax and National Insurance is deducted – and then the reduced amount of gross salary is then subject to these taxes. Overall you pay less for the benefit thanks to the tax deductions.

Car salary sacrifice works in exactly the same way.

The monthly cost of the car is taken from your gross salary reducing your taxable salary and the amount of National Insurance you pay.

So far so good.

However, the tax deductions aren’t all one way. You must pay benefit in kind taxation on the vehicle because the taxman regards the salary sacrifice car as a benefit.

Which is why our car salary sacrifice scheme is based around electric cars – or EVs (electric vehicles) for short.

The reason for this – apart from any environmental considerations – is because the level of taxation is so low on EVs. It means the overall cost – tax and NI reductions plus the addition of benefit in kind tax – is still lower than if you were to lease an EV with your own money.

To give you an example of how low the cost of benefit in kind tax is on an EV, let’s compare the benefit in kind tax payable on two identical cars – apart from their choice of ‘fuel’.

We’ll take the Vauxhall Corsa hatchback – the petrol version with a 130PS engine, and the electric version with a 136PS electric motor – so both with equivalent power outputs.

While they might have similar amounts of power under your right foot, the difference in tax payable is turbocharged. The petrol Corsa will cost a 20% tax payer £1,434 a year; the electric Corsa will cost the same tax payer  just £136 a year.

As a result, the tax uplift is negligible, making electric car salary sacrifice a highly valuable option for employees.

What else do I need to know about car salary sacrifice?

The significant advantage is that everything is included with the car: comprehensive insurance, full maintenance, and roadside recovery. So in any eventuality you are covered – in the same way that you would be if you were driving a company car.

There are further benefits, too. There is no initial rental to pay – which is what  would be required if you were funding a personal lease yourself – and there is no impact on your personal credit line (subject to your reduced income).

How do the mechanics of salary sacrifice work?

Once your employer has set up the electric car salary sacrifice scheme, you will be given a log in to our salary sacrifice car chooser.

Once you have logged in, you will see the range of electric cars that are available to you, and the effect of choosing the vehicle will have on your take home salary. You can even choose a variety of cars to see them side by side for better comparison.

Once you are comfortable with your choice of car, you then select it and the order will be put through for you and a delivery schedule allocated. Then all you have to do is wait for your new salary sacrifice car to be delivered!

And enjoy electric driving at a considerably reduced cost than if you had financed the car out of your taxed income.

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