Salary sacrifice schemes are an effective way for employees to gain additional benefits on top of their salary. Those such as Cycle to Work and child-care schemes are well known, but salary sacrifice car schemes are rapidly becoming popular again, following the alignment of several regulations. With CBVC Vehicle Management now including the scheme as part of its customer offering, we explain what it is and what the benefits are.
Salary sacrifice is a standard method of delivering a non-cash employee benefit in a tax efficient way. It sees employees give up part of their monthly salary towards the cost of paying for that benefit, with tax advantages for both employee and employer.
Car salary sacrifice schemes differ slightly from those such as bikes and child-care in that Optional Remuneration Arrangements (OpRA) come into force. These stop HMRC from losing out on too much income tax, because of the increase in popularity in salary sacrifice schemes.
However, the reason car salary sacrifice schemes are returning to prominence is that Ultra Low Emission Vehicles – those emitting 75g/km or less of CO2 – are exempt from OpRA. It’s allowing many employees easier access into new cars, and the greenest available. Full Battery Electric Cars (BEV’s) are particularly attractive.
How does a salary sacrifice scheme work for cars?
Essentially, an employee leases a brand new car through their employer, rather than directly as in a personal contract hire agreement. There’s no need to pay a deposit, no effect on personal credit files, and all monthly costs barring any fuel or electricity are combined into one monthly package – removed from the salary before deducting tax. This includes leasing costs, maintenance, insurance, car tax (VED), and breakdown cover.
Of course, because the car is an employee benefit, there is Benefit-in-Kind (BIK) to pay on the vehicle, but for pure-electric cars this is just 2% until at least the end of 2024/25. Even though BIK rates aren’t known after that time, pure-electric models are likely to remain in the lowest company car tax bands as the UK heads for the 2030 ban on the sale of new petrol and diesel vehicles.
The employer leases the electric car, with the cost deducted from the employee’s gross salary. Tax and National Insurance Contributions are then deducted from the revised salary, reducing the amount paid to HMRC. The net effect is the employee pays less than if they had leased the car privately.
Employers benefit from reduced Class 1a NIC payable on the employee’s salary, plus the associated positive associations linked to running EVs, such as reduced running costs and zero-tailpipe emissions for air quality benefits. Both employee and employer stand to save thousands over the course of the term of the car’s lease through a salary sacrifice car scheme (see examples below).
It is not completely all roses, many clients point out the risks associated with Early Termination, however with various tools available such as Early Termination Insurance, Driver Contingency and putting ENI savings aside these are far from insurmountable.
For a free consultation, please call Andrew Baker or Julie Hayes on 01283 351200 or email sales@cbvc.co.uk. We have a full guide pdf available for download by completing the form below.
