Expert Blog

What is a Salary Sacrifice car scheme?

20160122_What is a car salary sacrifice scheme?

Salary Sacrifice. It’s not a particularly appealing phrase. After all, who would want to sacrifice their hard-earned salary?

Because of this, some prefer to use the term 'salary exchange', but they're exactly the same thing. And you might be surprised by what you can get in exchange for part of your salary.

What are the benefits of Salary Sacrifice?

Wording aside, Salary Sacrifice is an extremely appealing concept. An employee gives up a portion of their salary to receive benefits from their employer. These benefits could be relatively small, such as a gym membership, or they could be relatively large, such as a car.

So, why would you go for such an arrangement, rather than taking all of your income and using some of it to buy your new car yourself? One big reason is that you’ll probably be able to get a better car through Salary Sacrifice, or the same one at a better price. Company cars – including those taken through Salary Sacrifice – are often cheaper than on the forecourt, because companies can buy them at a lower price than individual consumers.

They also come with all the other benefits of company cars. Servicing, maintenance, insurance, breakdown cover and road tax are all bundled in, meaning that you just need to pay for fuel. Compared to buying your car privately, a Salary Sacrifice scheme is generally much less of a burden on your wallet and your mind.

The recent tax changes for Salary Sacrifice

There’s also the potential to save on your tax bill, too. However, the Government recently changed the rules to make most Salary Sacrifice schemes less advantageous in this respect.

In his 2016 Autumn Statement, the Chancellor of the Exchequer, Philip Hammond, announced that the Income Tax and National Insurance advantages of most Salary Sacrifice schemes would end in April 2017. Most employees taking part in company car Salary Sacrifice schemes now have to pay Income Tax on either the amount of salary they sacrifice or the value of the car – whichever is greater. And employers now have to pay National Insurance Contributions on it too.

However, there are a few important details to these changes which mean that there are still tax savings to be made through Salary Sacrifice. The first is that old arrangements – those that were in place before the changes took effect on 6 April 2017 – won’t be affected until 2021. The second is that ultra-low emission vehicles (ULEVs) will be exempt from the changes entirely, so you can still enjoy the tax advantages of Salary Sacrifice if you choose an electric or hybrid car.

Finally, HMRC clarified in September 2017 that, for tax purposes, the amount of salary sacrificed only includes the amount used to actually finance the car. The other costs – maintenance, insurance, road tax, etc. – are not included. This means that, even if you don’t choose a ULEV, you could well end up paying less tax by taking your car through Salary Sacrifice.

How popular is Salary Sacrifice?

These schemes have been around for years. In some countries, they’ve even become a business unto themselves. Australia has an entire network of companies that specialise in ‘salary packaging’; which is to say, organising employees’ salaries to achieve an optimum blend of taxable cash and non-taxable benefits.

Salary Sacrifice is less widespread in Britain than it is in Australia, but it is an option that many thousands of employees are choosing. In October 2016, the British Vehicle Rental and Leasing Association estimated that there were approximately 70,000 Salary Sacrifice cars on our roads. And those who have chosen a Salary Sacrifice car are almost universally satisfied. A 2014 survey by OC&C found that 94% of them were happy with their decision.

Is Salary Sacrifice right for you?

Although hiring a car through a Salary Sacrifice car scheme is popular, this doesn’t mean it's for everyone. It needs careful consideration by employers, who have to ensure that their schemes are HMRC-compliant and don’t create costs that cannot be borne in the longer term.

It also needs careful consideration by employees, as in certain circumstances – such as employees earning at or near to the national minimum wage, or those on a final salary pension scheme who may be thinking of retiring – Salary Sacrifice simply wouldn’t be viable.

More information on Salary Sacrifice

Even with the tax changes last year, Salary Sacrifice remains an attractive way for many employees to drive a new car. If you’re interested and would like to know more, please contact us or call our team of experts on 0343 351 9073.

Updated: 22 February 2018. Originally posted on 22 January 2016.