What Are the Benefits of Implementing a Salary Sacrifice Car Scheme for Employees?
Quick Answer
A salary sacrifice car scheme can be a valuable employee benefit that helps businesses attract and retain staff while giving employees access to a new vehicle at a potentially lower effective cost. Employees exchange part of their gross salary for a company provided vehicle, reducing the amount of salary on which Income Tax and employee National Insurance are calculated. For electric vehicles, the combination of salary sacrifice and favourable Benefit in Kind tax treatment can make the savings particularly attractive. Employers can also benefit from reduced employer National Insurance costs, improved employee benefits packages and support for their sustainability objectives.
What is a salary sacrifice car scheme?
A salary sacrifice car scheme allows an employee to give up an agreed amount of their gross salary in exchange for a non cash benefit, in this case a vehicle provided by their employer.
Rather than an employee paying for a car from their take home salary, the agreed amount is deducted before Income Tax and employee National Insurance are calculated.
The employee is then liable for Benefit in Kind tax on the vehicle.
Salary sacrifice is particularly attractive for electric vehicles because of their comparatively low Benefit in Kind tax rates.
For employers, a well structured scheme can provide a valuable benefit without simply increasing employees' salaries.
You can learn more about how the scheme works on our salary sacrifice car scheme page.
1. Attract and retain talented employees
One of the biggest benefits of a salary sacrifice car scheme is the value it can add to an employee benefits package.
Recruitment is increasingly competitive, and employees do not necessarily judge an employer on salary alone. Benefits that provide a tangible financial or lifestyle advantage can help businesses stand out when recruiting.
A salary sacrifice car can provide employees with access to a brand new vehicle without having to arrange personal finance or find a large deposit.
For existing employees, offering access to a desirable benefit can also support retention and employee engagement.
2. Give employees access to potentially significant savings
The tax treatment is one of the main reasons salary sacrifice car schemes have become popular.
Because the vehicle cost is deducted from gross salary, employees can reduce the amount of salary subject to Income Tax and National Insurance.
The actual saving depends on several factors, including:
The employee's salary
Their Income Tax position
The vehicle selected
The salary sacrifice amount
The vehicle's Benefit in Kind value
The terms and inclusions of the scheme
This means it is important to look at the individual's circumstances rather than assuming that every employee will achieve the same saving.
See what the numbers could look like
Our Salary Sacrifice Calculator can be used to illustrate the potential cost of a salary sacrifice vehicle and compare the figures based on an employee's circumstances.
It is a useful starting point for employees who want to understand whether salary sacrifice could work for them before choosing a vehicle.
3. Electric vehicles can make the scheme particularly attractive
Electric vehicles are a major part of the salary sacrifice market because of their favourable Benefit in Kind treatment.
The tax advantage does not mean that an electric vehicle is completely tax free. Employees still pay Benefit in Kind tax, and the applicable rates can change over time.
However, the combination of salary sacrifice and the relatively low Benefit in Kind rates for zero emission cars can make an electric vehicle considerably more attractive through a salary sacrifice scheme than funding an equivalent vehicle from net salary.
Electric vehicles can also provide other potential savings through lower energy and maintenance costs, particularly for employees who can charge at home.
4. Employers can reduce National Insurance costs
Salary sacrifice can provide a financial benefit to the employer as well as the employee.
Because the employee's contractual salary is reduced, the employer may also pay less employer National Insurance on that salary.
This can help offset some or all of the cost of providing the scheme, depending on the vehicle, salary sacrifice amount and the way the scheme is structured.
For this reason, salary sacrifice can be an attractive employee benefit for businesses that want to enhance their benefits package without simply increasing salaries.
Employers should, however, take appropriate professional advice to understand the tax and National Insurance implications of their particular scheme.
5. Support your company's sustainability objectives
For businesses with environmental or ESG objectives, an electric vehicle salary sacrifice scheme can be another practical way of encouraging lower emission transport.
Employees may be more willing to consider switching to an electric vehicle when the financial barrier is reduced through salary sacrifice.
For employers, this can contribute towards wider sustainability initiatives and demonstrate that environmental objectives are being supported through practical employee benefits rather than simply through corporate statements.
6. Provide a simple and predictable employee benefit
Many salary sacrifice car schemes can include a number of costs within the monthly package, depending on the provider and vehicle selected.
These can include:
Vehicle leasing
Servicing and maintenance
Breakdown assistance
Tyres
Road tax
Insurance, where included by the scheme
Having many of these costs incorporated into one monthly arrangement can make budgeting easier for employees.
It can also remove much of the administration associated with employees arranging their own vehicle finance, servicing and other motoring requirements.
The exact inclusions will depend on the scheme provider, so employers should always check what is included before introducing a scheme.
7. Improve employee financial wellbeing
A salary sacrifice car scheme can also form part of an employer's wider financial wellbeing strategy.
Instead of an employee needing to find a deposit or pay for a vehicle entirely from their take home income, the scheme allows them to access a vehicle through their employment benefits package.
For employees who need a reliable vehicle, the ability to combine the vehicle and associated motoring costs into a predictable monthly arrangement can make household budgeting easier.
However, employees should always consider how salary sacrifice affects other areas of their financial position, such as pension contributions, statutory payments or other salary related benefits.
8. Offer a benefit without increasing basic salary
Salary increases can be expensive for employers because the additional salary can also increase National Insurance and other employment costs.
A salary sacrifice scheme provides another way of adding value to an employee's overall remuneration package.
Instead of simply increasing salary, an employer can provide access to a benefit that employees may value considerably.
This can be particularly useful for businesses looking to improve their employee benefits offering while maintaining control over overall employment costs.
Is salary sacrifice suitable for every employee?
Not necessarily.
Salary sacrifice can be particularly attractive for employees who:
Need a new vehicle
Are considering an electric vehicle
Have a suitable salary level to benefit from the tax treatment
Want predictable monthly motoring costs
Prefer not to arrange personal vehicle finance
Can benefit from the vehicle and mileage allowance arrangements offered by their employer
However, employees should consider their own circumstances carefully.
Someone who already owns a reliable car outright, for example, may find that continuing to use it is more cost effective than entering into a salary sacrifice agreement.
The important point is that salary sacrifice should be assessed on the individual's circumstances rather than treated as automatically being the cheapest option.
What should employers consider before introducing a scheme?
Before implementing a salary sacrifice car scheme, employers should consider:
Eligibility
Decide which employees will be able to participate and whether there should be any minimum salary or employment requirements.
Contractual arrangements
Salary sacrifice involves changing the employee's contractual remuneration, so the arrangement needs to be properly documented.
Employee affordability
Employees need to understand the actual impact on their take home pay rather than simply looking at the headline monthly lease cost.
Benefit in Kind taxation
Employees will generally have a Benefit in Kind tax liability when receiving a company car through salary sacrifice. Employers need to ensure the appropriate reporting and tax treatment is applied.
Early termination
Employers should understand what happens if an employee leaves the business, goes on extended leave or can no longer participate in the scheme.
Scheme administration
Consider how vehicles will be selected, ordered and delivered, and who will deal with employee questions and changes during the agreement.
Why salary sacrifice can be a win for both sides
When structured correctly, a salary sacrifice car scheme can create a genuine benefit for both the employer and employee.
Employees can potentially access a new vehicle at a lower effective cost, while employers can offer a valuable benefit that supports recruitment, retention, financial wellbeing and sustainability.
For electric vehicles in particular, the combination of salary sacrifice and Benefit in Kind taxation can make the overall proposition particularly compelling.
The key is to look at the numbers rather than simply assuming that salary sacrifice will always be the cheapest option.
Want to see how much an employee could save?
If you are considering introducing a salary sacrifice car scheme for your employees, VCEA can help you understand how the scheme could work for your business.
Visit our Salary Sacrifice Car Scheme page to find out more, or use our Salary Sacrifice Calculator to illustrate the potential costs and savings.
Frequently Asked Questions
Is salary sacrifice a good benefit for employees?
It can be. Salary sacrifice can give employees access to a new vehicle while reducing their taxable salary. The potential benefit depends on their salary, tax position, vehicle and the terms of the scheme.
Are salary sacrifice cars cheaper than buying or leasing privately?
They can be, but it is not guaranteed. Salary sacrifice can reduce Income Tax and National Insurance on the sacrificed salary, while Benefit in Kind tax still applies. The best comparison is the employee's actual take home cost against the equivalent private leasing or ownership costs.
Are electric cars better for salary sacrifice?
Electric vehicles are generally particularly attractive because of their favourable Benefit in Kind tax treatment. This can make the overall cost significantly more attractive than salary sacrificing a higher emission vehicle.
Does the employer save money with salary sacrifice?
Potentially. Because the employee's gross salary is reduced, the employer may pay less employer National Insurance. The exact saving depends on the employee's salary and the amount sacrificed.
Does salary sacrifice affect my pension?
It can, depending on how the employer's pension scheme and salary sacrifice arrangement are structured. Employees should check how the arrangement will affect pensionable pay before joining.
Can employees leave their employer while they have a salary sacrifice car?
An employee leaving the business does not necessarily mean the agreement simply ends. The consequences depend on the scheme and contract, so employers and employees should understand the early termination arrangements before entering into an agreement.
Do employees pay tax on a salary sacrifice car?
Yes. A company car provided through salary sacrifice is generally subject to Benefit in Kind taxation. The amount depends on the vehicle's taxable value and the applicable Benefit in Kind rate.
Can salary sacrifice be used for petrol or diesel cars?
Salary sacrifice arrangements can cover different types of vehicles, but the financial benefits are often particularly compelling for electric vehicles because of their Benefit in Kind tax treatment.
How much can an employee save through salary sacrifice?
There is no single figure that applies to everyone. The saving depends on salary, tax band, vehicle, lease cost, Benefit in Kind rate and what is included in the scheme.
The easiest way to understand the potential benefit is to run the numbers for the individual employee. You can use the VCEA Salary Sacrifice Calculator to get an illustration.
How can my business introduce a salary sacrifice car scheme?
The first step is to understand what type of scheme would work for your employees and business. VCEA can discuss the requirements with you and help you assess the available options.
