Is Salary Sacrifice The Best Vehicle Funding Option For Your Employees?

16 May 2023

Is Salary Sacrifice The Best Vehicle Funding Option For Your Employees?

Traditionally, a company car has always been a status symbol and a sign of aspiration and ambition. It showed that you were doing well, had a comfortable lifestyle and was something you could use to impress your friends and family. After all, who wouldn’t want a new car that is paid for in terms of service and maintenance, tax and insurance? However, of course the option of a company car has not always been open to everyone, and it does have an image of exec-level elitism and not being inclusive, so now there are other ways to fund a vehicle through your employer, and which are open to all employees across the board.

These schemes are seen as being fairer and more inclusive, and hence are also attractive in terms of promoting good employers who can use these benefits as part of an appealing remuneration package, which in turn can attract and incentivise the very best employees on the market. The different schemes available are the traditional company car model, the car allowance model and salary sacrifice, and here we will summarise the characteristics and the pros and cons of each to help you make an informed decision on what is best for you.

Understanding the tax situation

While driving a company car might help you impress the neighbours, not many people talk about the tax implications it brings. Unfortunately, the reality is that if you are using a vehicle for both business and private motoring then you have to pay what is called Benefit-In-Kind (BIK) tax, otherwise known as company car tax. This applies to company cars and cars driven through a salary sacrifice scheme, but it doesn’t apply if you receive a car allowance.

The amount of BIK tax you pay is based on the value of your vehicle, the fuel and CO2 emissions of the vehicle and your current income tax bracket. There are various tables available through which you can calculate what BIK tax you will be paying. This will help you compare the financial implications depending on what vehicle you choose.

How the different company car schemes work

Now let’s look at the three different types of company car schemes. It is rare to have the option of all three of these schemes, and most employers will opt for one or two at the most, but here we will attempt to give you a better general understanding of them.

  • Company car scheme

The conventional company car scheme is where the employer owns or leases a vehicle and the employee drives it. So the employee has no financial obligation (other than BIK tax) and all the motoring costs are covered by the employer, such as service and maintenance, tax, insurance and business fuel. However, the flipside of this is that you are likely to have little choice over the vehicle you drive or how long you will drive it. Also, you will be paying a high BIK rate if the vehicle is expensive and/or if the CO2 is high.

  • Car allowance

With this scheme an employer will reward an employee with an extra cash allowance on top of their salary, which must be used towards the costs of ownership/lease of a vehicle, and its running costs, so this is a regular monthly payment. The cost to the employer can be the same as a conventional company car (this depends on the level at which set) and involves much less management for the employer too. The employee has the freedom to choose any car (within reason as some companies have a policy, ie no old cars etc) and funding model available on the market and could potentially save cash by opting for a cheaper vehicle. There is no BIK tax to pay but the employee does have to pay income tax and national insurance contributions on the car allowance (and the employer also has to pay Employer Class 1 contributions). The car is the employee’s to own/lease and therefore they wouldn’t have to return it if they left their job, but would still have to fund it.

In comparison to a company car, with a car allowance you wouldn’t be able to renew the vehicle every couple of years, unless you leased it. And the allowance may not cover all your motoring expenses. The amount of allowance an employer will offer isn’t always negotiable, it just depends on the employer’s policies, so you may still have additional motoring expenses to pay each month.

  • Salary sacrifice

With a salary sacrifice car scheme you can use a portion of your salary each month to pay towards a lease agreement on a new vehicle. Salary sacrifice works for low-emission vehicles, and this means your taxable salary is reduced and you pay less income tax and national insurance. In return, your salary sacrifice agreement will usually include all your motoring costs (with the exception of fuel/electricity for private mileage). Funding your motoring this way could be cheaper than a regular loan agreement for ownership, and other benefits include no credit check, no deposit and no ongoing obligation if you change jobs, although you would need to return the vehicle.

Going green with your driving means you will pay less BIK tax for a zero emission vehicle, at least until 2028, so with much more choice on the electric vehicle (EV) leasing market, now might be the time to transition to EVs through salary sacrifice.

What scheme should I choose for my company car?

This of course depends on what your employer is able to offer you, and therefore your employer’s policies and to some extent, their generosity. But it also depends on your personal circumstances in terms of finances, lifestyle and motoring needs. The salary sacrifice scheme offers the most benefits in terms of vehicle choice, financial incentives, low-risk and flexibility, and as such tends to suit most people.

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