Motoring is an essential element of our daily lives. We spend a lot of time driving, or thinking about and planning our driving, and is a critical cost that we do our best to manage. Monitoring our fuel usage and car insurance is one way to balance our motoring costs, but how we source and fund our vehicles is a much bigger factor in making motoring affordable. Purchasing a vehicle is becoming an outdated model, particularly for people who like to swap their vehicles regularly, and the two main shorter-term options are salary sacrifice and vehicle leasing.

These each offer considerable savings on purchasing a vehicle, but which one is best? Here we compare the two and highlight some important benefits and considerations.

Understanding salary sacrifice and car leasing

Let’s first look at the basics of salary sacrifice and car leasing:

Salary sacrifice – This is an increasingly common non-cash benefit for employees of businesses which opt into a salary sacrifice scheme. The model works by an employee signing-up voluntarily and agreeing to release a portion of their monthly salary in exchange for a lease agreement on a company vehicle. The salary sacrifice is taken on gross salary, if the vehicle is fully electric, and hence the employee will enjoy a reduction in the income tax and national insurance they pay. Additionally, as the employer is responsible for leasing the vehicle, they pay the VAT instead of you. After this the vehicle supply works much like a leasing agreement.

Vehicle leasing – Vehicle leasing is also known as personal contract hire (PCH) or business contract hire (BCH), whereby a car leasing company leases the vehicle to you or your business on an agreed fixed term, usually between 12 months and 48 months. You pay a monthly cost for exclusive use of the vehicle for the lease term, at the end of which you return the vehicle and, if desired, choose a new vehicle and start a new lease. The monthly fee you pay will include road tax and insurance, and in most cases also includes service and maintenance agreements. BCH can often be cheaper than PCH because, as a business, you can reclaim the VAT.

How salary sacrifice and car leasing compare

We broke each vehicle sourcing model down to compare them in detail for:

• Eligibility – Car leasing is available to anyone who has a full driving licence and a good credit record. However, salary sacrifice is only open to employees in full-time employment, and whose employer has opted in to a salary sacrifice scheme. Also, employees on a lower income may not be eligible because the portion of salary sacrificed may take them under the minimum wage threshold, which isn’t allowed.
• Deposit – Most leasing agreements require an initial payment which usually equals six or nine months’ payment upfront. However, a salary sacrifice car scheme requires no deposit.
• Monthly cost – Because both schemes are effectively lease agreements, the costs of driving the vehicle each month are largely the same, and in both cases are cheaper than purchasing the same vehicle on other forms of finance. This is because the lease agreement is effectively only covering the cost of depreciation experienced by the owner during the period you drive the vehicle, whilst a purchase loan is covering the entire ownership of the vehicle. It is worth considering that the best savings under salary sacrifice schemes are relating to electric vehicles (EVs), because the vehicle is effectively a company car and is therefore liable for BIK tax rates, and EVs have a lower BIK rate than other petrol/diesel vehicles.
• Ownership – In both cases the driver doesn’t own the vehicle and at the end of the agreement they will return the vehicle to the owner. With a lease deal this will be the leasing company, while under a salary sacrifice agreement the owner will be the scheme provider.

Considerations when comparing salary sacrifice schemes with leasing deals

There are a huge number of employee benefits when you start to analyse salary sacrifice schemes, relating to cost, flexibility and the range of vehicles available. But there are also important things to consider when making a choice:

• Because salary sacrifice is a workplace benefit, you will lose access to the vehicle if you leave your job in most schemes. However, if your new employer is with Pink Salary Exchange or is joining the Pink Salary Exchange Scheme you are able to keep your car with our community scheme feature where, as long as the employer is part of, or willing to be part of PSE, you can bring your lease vehicle with you to your new job.
• The best cost benefits are experienced through choosing an EV in the salary sacrifice scheme
• Much of the admin and management of the salary sacrifice is done by the scheme administrator, i.e. an employee of the business you work for, so there is much less work and hassle in sourcing a vehicle through salary sacrifice compared to leasing.
• Salary sacrifice is effectively reducing your declarable income, and while you get a non-cash benefit for this in return, it affects mortgage and loan applications and means you pay less pension contributions.
• The bigger savings through salary sacrifice are experienced if you are in a higher 40% tax bracket, although you still make considerable cost savings in the lower tax bracket.

How to decide between salary sacrifice and car leasing?

As with any motoring or financial decision, you should do plenty of research and plenty of calculations. It is recommended to take financial advice to establish exactly how each move will affect you financially, although your employer will give you good information on how a salary sacrifice scheme works. There are great benefits to both schemes and the best solution will be applicable to your individual circumstances. If you decide that salary sacrifice is the best, then you can sign-up for our next generation scheme here, and if you opt for car leasing, then check out our sister company Pink Car Leasing and the great range of affordable car leasing deals they offer.