What Is Salary Sacrifice?

What Is Salary Sacrifice?

A salary sacrifice scheme is a way for employers to provide a benefit to their employees in a tax-efficient way. In return for this benefit, employees give up a portion of their salary to pay for the cost of the benefit. However, when it comes to car leasing salary sacrifice is a little different. 

Salary Sacrifice and Car Leasing?

Salary sacrifice allows an employee to lease a brand-new car without worrying about a deposit or their own credit score eligibility. So how does it work?

Similar to other salary sacrifice schemes, your company will reduce your overall salary and use that amount to provide you with a brand-new car lease for up to five years. A thing to note is that while you may pay less towards tax and national insurance as a result, you may have to pay a company car tax (called BiK or “benefit in kind”).

Your company, as with any lease, will not own the car and it must be returned at the end of the contract in good condition and up to fair wear and tear standards. You must also stick to your agreed mileage amount which can be anything from 5,000 miles up to 30,000. Unless you opt for a maintenance package, car maintenance must be paid for and provided by you as well as any insurance payments.

Is a salary sacrifice scheme the same as a company car allowance?

A salary sacrifice scheme is different from a company car allowance as with a company car allowance you are given additional income that can be put towards the purchase or lease of a car that you will use for business reasons whereas with a salary sacrifice scheme, a portion of your salary is used by the business to pay for a car through the company instead.

What is BiK (Benefit In Kind) tax?

Back in 2017, new legislation was introduced that aimed to cut down on tax and national insurance avoidance. This legislation (OpRa or Optional Remuneration Arrangements) means that any cars in a salary sacrifice scheme that has more than 75g of CO2/km will need to pay the BiK tax.

The BiK tax is calculated using your income tax, overall car value and the car's CO2 emissions. The OpRA legislation means that if you are looking to drive a petrol or diesel car then you may be better off going through a personal lease rather than funding it through salary sacrifice.

However, if you have your sights set on an electric or ultra-low-emission vehicle, salary sacrifice might be a great choice for you. When it comes to the BiK tax, all-electric vehicles and ULEVs are exempt as they produce less than 75g of CO2/km.

Benefits of Salary Sacrifice

Benefits of Salary Sacrifice Car Lease for Employees:

• You get a brand new car delivered straight to your door with road tax and warranty included.
• No income tax or national insurance tax on the salary that has been sacrificed. On EVs or ULEVs, you pay less BiK tax than you would income tax or national insurance.
• Agreed monthly payment that comes straight out of your salary, no need to worry about paying the lease yourself each month.
• The car can be used for both business and personal reasons.

Things To Watch Out For:

• Salary sacrifice reduces your salary, so you need to be careful if you are applying for credit or a mortgage.
• If you are wanting a petrol or diesel car, you may be better off funding it through a personal lease as BiK tax tends to be higher than the amount you would save on income tax and national insurance.

Anything We’ve Missed

If there is anything we’ve missed and you are still unsure about anything, you can contact our team at 0345 350 3776 or enquiries@willowleasing.com. You can also request a call back here.