Salary Sacrifice: How does it work?

What is salary sacrifice?

It's a way of giving up a portion of your gross salary in return for non-cash benefits provided by your employer. In reducing your salary, you pay less tax and National Insurance while enjoying things ranging from tax-free pension contributions to bicycles under the 'cycle to work' scheme. To take advantage, your employer has to have a salary sacrifice scheme in place.

What are its pros and cons?

The pros first. It's a cost-effective way to acquire valuable benefits and services.
Depending how close your full salary is to a tax threshold, because you're paying less tax and NI your take-home salary could actually increase. Your employer pays less NI, too, and some divert this saving into their employees' pension contributions.
As for the cons, reducing your gross salary could affect how much money you can borrow. Products or services acquired using salary sacrifice are not free; they come at the expense of a reduction in your gross salary, albeit balanced by reductions in your tax and NI contributions. You may also have to make top-up payments if the benefit is expensive. 

What have cars to do with salary sacrifice?

If your employer operates a salary sacrifice scheme, you could, if it offers the benefit, have a new car on it. Cars are expensive, so the contribution you sacrifice from your gross salary won't cover its total cost, meaning you'd still have to make a contribution to it from your take-home pay but it could be a lot cheaper than providing it yourself.

How does it work?

The car is leased by your employer from a leasing company for, typically, three or four years. You never own it; it must be handed back at the end of the term. There's no deposit to pay while maintenance, tyres, the road fund licence and even insurance for you and a named driver are included in the monthly payment. All you have to add is fuel. To qualify, you must be over 21, have worked at your company for at least six months and have held a driving licence, which has no more than six points, for at least the same length of time. You can't take advantage of a salary sacrifice scheme if the reduction in your gross salary takes it below the minimum wage.

How much could I save?

On a lease costing £600 per month, a 40% tax payer would sacrifice £240 of their gross salary each month and so only pay £360 out of their net or take-home pay. This compares with the full £600 monthly charge that someone leasing the car themselves would pay. 


What's the catch?

The lease charge isn't the whole story. As far as HMRC is concerned, a car obtained on salary sacrifice is provided by the employer and so regarded as a perk that must be taxed. How much tax you pay is calculated on the car's so-called P111D value: its list price including extras and VAT. This figure is multiplied by the car's benefit-in-kind (BIK) rate, a figure, expressed as a percentage, that is based on the CO2 emissions band the car falls into (there are 31 bands spanning 0g/km CO2 to 170-plus). You can find your chosen car's BIK rate in the vehicle brochure. Multiplying the result by your personal tax band gives you your annual tax due on the car.

Are some cars more tax friendly than others?

They are and easily the friendliest of all are battery-electric cars. To reflect their zero 'tailpipe' emissions and to encourage their adoption, EVs attract a BIK rate of just 2%. This will rise to 3% from the 2025/26 tax year and then to 5% by 27/28. These figures compare with, for example, a BIK rate of 29% (rising to 30% from tax year 2025/26) for a Ford Focus 1.0T Ecoboost with CO2 emissions of 124g/km. 

So a car on salary sacrifice is a win-win?

Yes, at least when used to lease an electric car and, of course, for those who can afford to make the required monthly lease contributions from their take-home pay. For cars with higher BIK rates – hybrids and especially pure petrol and diesel cars – it makes no sense, which is why their take up on salary sacrifice schemes is almost zero. 

How popular is it?

It's reckoned around one third of companies and public bodies offer new cars on salary sacrifice, most of them EVs, with employee take up at some organisations as high as 10%. Leasing companies providing the cars include Arval, which has 5000 on its fleet, 88% of them EVs. More leasing providers are entering the market as the schemes become more popular. 

What should an employee consider before leasing an EV on salary sacrifice?

Can you afford the payments? This is an obvious but important question. Remarkably, no credit checks are required to take a car on salary sacrifice meaning, for the sake of a shiny new EV, it would be easy to ignore your other financial commitments and get into debt. In addition, no deposit is required, which can be an encouragement to take on more debt than you might be able to repay.
Other things to consider include how you will charge your new EV. Home charging on a driveway is the easiest solution but if you live in a flat, you'll be reliant on the public charging network. If you leave your employer, you'll lose the car. How would you replace it?

So in conclusion…

For the right person – a responsible borrower who has budgeted to lease a car from their take-home salary – having an electric car on salary sacrifice makes a lot of sense. It's cheaper than leasing one yourself and the charge includes everything but the electricity to charge it. Of course, buying and running a used EV is cheaper still but that's another debate…


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