Discover what a salary sacrifice car scheme is and how it works, as well as the benefits it could bring to your business and employees.
A salary sacrifice car arrangement is an agreement between you and your employee, in which they accept a lower taxable salary in exchange for a vehicle.
Your employees receive a lower gross salary, allowing for savings on income tax and National Insurance. Keep in mind that when providing a company car, you also have to pay Class 1A National Insurance Contributions (NICs) for each car you provide to your employees.
In this guide, you’ll learn about the following:
- How a salary sacrifice scheme works for cars
- The tax efficiencies of offering a salary sacrifice scheme to employees
- Whether you should choose a salary sacrifice or company car scheme
If you’re a UK-based business looking to provide your employees with a salary sacrifice car scheme, view our solutions to see how we can help.
Why choose a salary sacrifice car scheme?
Salary sacrifice schemes can be mutually beneficial for both your business and your employees. It’s an attractive benefit with Electric Vehicles (EVs), as the current Benefit-in-Kind (BiK) rate for EVs is 4%.
The UK Government has outlined that it won’t increase above 5% until 2028. The scheme allows employers to offer a no-cost car benefit to some or all of their employees, creating tax-efficient savings on EVs.
To generate savings on salary sacrifice cars, they must have under 75g/km of CO₂ emissions in accordance with the optional remuneration arrangement (OpRA), which was established in 2017.
CBS’ team of experts is ready to learn about you and your business. We can:
- Examine your existing car benefit arrangements
- Understand your employee car benefit objectives
- Design an optimised fleet solution for your business
Discover how CBS can help your business here.
If you’re still unsure about adding a salary sacrifice car scheme to your business, read our guide below to find the best solution for both your company and employees.
Four simple steps on how salary sacrifice works for a car
- Employees choose a vehicle from a list controlled by you. Selection, ordering and delivery all managed on the CBS Portal.
- The vehicle is leased to your business, and you provide it to your employee as a company car. Rental includes maintenance, and insurance can be added.
- Your employees sacrifice some of their salary in exchange for the car benefit. They make savings on tax and Class 1 NICs, while this scheme is at least cost-neutral for business.
- The renewal process is easy and straightforward. At the end of the term, employees can choose a brand-new car.
Keep your employees happy by giving them an affordable way to drive an EV, helping them on their green journey, and removing the hassle of sourcing insurance or organising a maintenance package.
How is a salary sacrifice scheme tax-efficient?
When it comes to company car schemes, your employees sacrifice a fixed amount from their gross salary in exchange for the car. As a result, they pay less income tax and NICs.
- A salary sacrifice car scheme can reduce the net monthly cost of a vehicle for employees by allowing payments to be taken from gross salary before tax and National Insurance.
- Once an employee’s taxable salary is reduced, your business also pays fewer Class 1 NICs.
- For your employees, BiK tax is applicable under these schemes.
- For your business, Class 1A NICs are applicable.
Read our guide to discover the tax implications of a company car below and what they mean for fleet car schemes:
Electric Vehicles = Low BiK rates
With the low BiK rate of just 4% for EVs, electric cars are the most cost-efficient vehicles. You can choose between the following two options:
- Whether your employees pay the 4% BiK for their salary sacrifice electric car.
- Whether they pay more towards the maintenance costs of the car.
Either way, you’re still offering an accessible option for your employees to drive a brand-new EV.
Salary Sacrifice vs Company Car
According to HMRC, both salary sacrifice cars and business leasing cars are classed as company cars. However, there are some differences:
- For a traditional company car, your employees pay the appropriate BiK tax, depending on the car’s emissions and P11D value of the car.
- For salary sacrifice schemes, your employees give up some of their gross salary in exchange for a car, and they pay minimal BiK tax if they choose an EV. As an employer, you pay Class 1A NICs as both salary sacrifice cars. Business leasing cars are classed as company cars.
In both cases, the car owner is Car Benefit Solutions (CBS), and we lease the vehicles to your business. Insurance and maintenance are generally included, and we can provide the full package.
However, it’s up to individual employers to decide what level of benefit they want to provide. To find out more information about how CBS can help your business with salary sacrifice and company schemes, get in touch with a member of our team today:
Salary Sacrifice Scheme FAQs
What cars are available under salary sacrifice schemes?
Electric Vehicles are the most efficient cars for salary sacrifice schemes. However, as an employer, you’re in control of the choice list you offer your employees. You also need to ensure that a salary sacrifice car doesn’t impact an employee’s National Minimum Wage.
Does HMRC need to know about a salary sacrifice car?
It’s recommended that your employees notify HMRC that they’re driving a company car, or when they change their company car so that they can update their records and tax code without delay.
They can update HMRC online here, by downloading the HMRC app or calling 0300 200 3300.
Who owns the salary sacrifice car?
Car Benefit Solutions is the legal owner of the vehicle.
Does salary sacrifice show on a payslip?
Yes, your employees see the salary sacrifice as a deduction from gross pay on their payslip.
Do you get taxed before or after?
Tax for your employees and the business will be taken after salary sacrifice, making savings for both parties.
Are salary sacrifice car schemes worth it?
If you’re in the market for a new electric or low-emission vehicle and are considering leasing options, a salary sacrifice car scheme could be a more cost-effective solution. If you want predictable maintenance costs included in your fleet package and you want to be free of the burden of car ownership, again, a salary sacrifice car scheme can offer both.
Can mileage be claimed?
Yes, employees are required to record and report any business miles they travel each month.