Car Salary Sacrifice Schemes Explained

Interested in an alternative to company cars? A car salary sacrifice scheme could be the right option for your business and an worthwile insentive for prospective new hires. Before signing onto one, learn exactly what a salary sacrifice scheme is and what it means for both businesses and employees.
new cars parked in company parking garage from salary sacrifice scheme

Initially, a car salary sacrifice scheme sounds too good to be true. A sacrifice scheme where employees receive a new car with the company’s leasing powers, yet somehow both employee and employer wind up saving money in the long-run? It sounds like a pipe dream, but in reality that’s how a car salary sacrifice scheme works. 

To ensure you’re comfortable enrolling in a car salary sacrifice scheme, this article will discuss the benefits of salary sacrifice for cars and how employers can set one up.  

What Is a Car Salary Sacrifice Scheme? 

In essence, a car salary sacrifice scheme allows an employee to give up a portion of their gross salary in exchange for a fully maintained car. Because they’ve sacrificed a portion of their salary, employees will save money on taxes and they won’t have to pay national insurance (NI) for the amount of money they’ve given up.

The only taxes they’ll be required to pay is a benefit-in-kind (BIK) tax on the car. BIK tax is less than income tax, so the employee will still be saving money. 

Read more: 2021 Guide for Tax on Company Cars

Note that salary sacrifice cars are not considered company cars. Instead, they are private cars that are leased by employers but financed by individual employees. 

Get a Beginners Guide to Fleet Taxes:

Top Benefits of Using a Car Salary Sacrifice Scheme

There are so many benefits for both employers and employees by utilising a car salary sacrifice scheme. Below are just five reasons to consider establishing a salary sacrifice for cars. 

1. They’re Low-Cost or Cost-Free to Employers 

Employers can save money through car salary sacrifice schemes in a few different ways. The two primary ways employers save money is through reduced NI contributions and corporation tax. Employers still have to pay NI contributions on the provision of the car, but it won’t be as high as paying the NI contributions for the amount of salary that was sacrificed.

The money saved from taxes and NI contributions will offset some of the expenses for leasing the cars, thus making this kind of salary sacrifice scheme low-cost for employers. 

Read more: What is P11D For Cars?

2. They Save Employees Money 

saving money with car salary sacrifice scheme

Employees also greatly benefit from participating in a salary sacrifice for cars. They’re able to drive a brand new car for less money than if they’d leased it privately. Moreover, employees will benefit from their company’s corporate purchasing terms on their new car.

For example, most cars in a salary sacrifice scheme require no deposit or credit checks, include insurance and more. All of which can be accessed by the employee at no additional cost to them, thus saving them money in the long-run. 

Additionally, cars producing no CO2 emissions have a 0% BIK tax rate as of April 2020. The tax rate raises by just 1% each year until 2023, so employees will save money hand over fist in the meantime. 

3. The Cars Come with No Risks 

A major perk of car salary sacrifice schemes for both employers and employees is that the cars come with almost no risks. Servicing, MOT, maintenance, road taxes and more are included in the monthly fees.

Moreover, if the employee resigns and the contract is terminated early, the company doesn’t have to keep the car. This ensures that the company is paying only for the cars that are actively being used by current employees. 

4. They’re Great for Employee Recruitment & Retention 

Being offered a car is a huge perk that few employees can resist. A car salary sacrifice scheme is an effective way to recruit new employees and encourage them to stay with the company. If an employee resigns and has to cancel their leasing contract early, they’ll have to pay an early termination fee and / or give up the car. This acts as an incentive to stay with the company, thus boosting employee retention rates. 

5. They Support a Greener Fleet 

Electric cars and cars with low CO2 emissions come with a slew of tax breaks and other purchasing incentives. If a company is considering a salary sacrifice scheme for cars, leasing electric vehicles will not only save it money, but it will also reduce its carbon footprint. Prospective employees may also see this as a perk of working for one company compared to another. 

Read more: How to Use Fleet Management GPS Reporting to Promote a Greener Fleet

How to Set Up a Salary Sacrifice Scheme for Cars 

Creating a car salary sacrifice scheme requires quite a bit of legwork, but the rewards are worth it in the end. Here’s an overview of how to set up a salary sacrifice scheme for cars: 

  • Create a business plan: You’ll need to make a business plan that details every aspect of the scheme. This includes finding a provider that can source and lease the cars, determining what restrictions (if any) employees will have when selecting cars and how you plan to promote the scheme. 
  • Receive HMRC approval: Before implementing the scheme, your business must receive approval from the HM Revenue and Customs. 
  • Promote the scheme: One of the most important aspects of the scheme is to clearly communicate the usage and benefits of it to current and prospective employees. 

Similar article: Employee Company Car Agreement | Contract Template And Tips

Want to Learn More? 

A car salary sacrifice scheme benefits employers and employees in numerous ways. Both parties will save money on taxes and NI contributions, plus the cars come with no risks.

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