Salary sacrifice for employees FAQs 2023
- What is salary sacrifice?
- How does car salary sacrifice work?
- Are salary sacrifice schemes worth it?
- How does salary sacrifice for employees work for EVs?
- What are the benefits of salary sacrifice for employees?
- What is the maximum salary sacrifice?
- Who can salary sacrifice a car?
- Can salary sacrifice reduce tax?
- Will salary sacrifice affect my pension?
- Do I own the car?
- Does it have to be a new car?
- Does it have to be an electric car?
- How does minimum wage and salary sacrifice work?
- What happens if I go on maternity leave?
- What happens if I leave the company?
- How long is salary sacrifice for?
- Does it come with insurance?
- What should you consider before doing a salary sacrifice scheme?
Heard about car salary sacrifice for employees? Not quite sure you’ve grasped the concept quite yet? We don’t blame you. A salary sacrifice car lease scheme for employees can seem like quite a complex concept, but we’re here to change that.
Read on for all the frequently asked questions about salary sacrifice for employees.
What is salary sacrifice?
Salary sacrifice is an incentive promoted by employers to either retain or gain new employees. It also allows significant benefits to the employee.
The scheme involves taking a portion of the employee’s salary in order for them to gain something in return.
This can vary from many products and services such as healthcare, childcare, gym memberships, and more. The most popular scheme is a salary sacrifice car scheme.
How does car salary sacrifice work?
It works by taking a portion of the employee’s salary in return for a brand-new car.
When you lease a car through salary sacrifice, you are essentially getting a car for less!
You deduct a small portion of your wage and in return, you get a brand-new car.
This is usually a lease finance scheme, so whilst you can drive it around to and from work, park it at home and use it for personal trips on the weekend – it is the property of the lease company which has an agreement with your employer.
Here is a working example:
John wants an electric car. His salary is £36,000 per year or £3,000 per month.
After-tax his take-home pay is £2,350.79 a month (the tax year of 2022).
If he leases an electric car worth £300 a month, without salary sacrifice, he will be left with £2,050.79 a month after tax.
What if he leases an EV through salary sacrifice?
The benefit here is he can pay the £300 (cost of EV) before tax is deducted.
So, you do not pay income tax or national insurance contributions on this £300.
If he leases an electric car worth £300 a month, he will be left with £2,150.54 a month after tax.
That is a total saving of £99.75 a month with salary sacrifice! So, you are only paying £200.25 a month for a brand-new car worth £300 per month.
Are salary sacrifice car schemes worth it?
Yes, as you get a new car costing you less than what you could get outside of the scheme which also includes servicing, road tax, and maintenance. All of which is paid before tax and national insurance deductions from your salary.
How does salary sacrifice for employees work for EVs?
The general rule of thumb is lower emission vehicles ensure a lower Benefit-In-Kind rate, which is the tax you pay on your salary sacrifice company car.
So, electric cars are fantastic to opt for, as they are zero emissions and do not have an engine just an electric motor. It’s also another reason why they are a popular choice when employees select their car through the scheme.
What are the benefits of salary sacrifice for employees?
- With an electric car salary sacrifice scheme, a home charger can be included with your lease
- A brand-new vehicle that exists within the scheme
- Pay less tax and National Insurance (NI)
- Access to corporate discounts which means a reduced vehicle cost
- The agreement includes maintenance, servicing and road tax
- Easy fixed monthly payments with no credit check
What are the disadvantages of salary sacrifice for employees?
A disadvantage to salary sacrifice is that it does reduce your salary which may in turn affect your pension contributions.
Another disadvantage is that you are committed to the vehicle for the period of the lease and you would have to hand your vehicle back if you were to leave your employer.
If you damage the vehicle or it becomes damaged whilst in your control you may be liable for repair costs.
What is the maximum salary sacrifice?
This will depend on your earnings and what an employer is prepared to offer you.
The main priority for an employer is that the scheme will not take the employee’s salary below the national minimum wage.
You should not enter into a salary sacrifice where your take-home pay would not comfortably cover your other commitments.
Who can salary sacrifice a car?
If you are an employee working at a company where a salary sacrifice scheme is available, and your wage allows you to partake in the scheme, then you should be able to salary sacrifice a car.
Can salary sacrifice reduce tax?
Yes, it can reduce income tax on your personal contributions as you are paying tax on a reduced salary.
Salary sacrifice for employees also allows reduced national insurance contributions.
Will salary sacrifice affect my pension?
As you are reducing your salary, if your pension contribution is based on a percentage of your salary then your monthly contributions would reduce pro-rata in most cases.
How does minimum wage and salary sacrifice work?
If after the salary deduction, your wage has been taken to below the national minimum wage, then you will not be able to take part in the scheme.
Even if you just about make it, you should always ensure you have a salary that is comfortable enough to live on whilst considering the cost of your own personal lifestyle.
Do I own the car?
No, salary sacrifice car schemes are usually done on a lease agreement so the vehicle is the property of the lease company which has an agreement with your employer. At the end of the agreed contract on the vehicle, you will hand this back and have the opportunity to choose a new vehicle via the salary sacrifice scheme again.
Does it have to be a new car?
Yes, which is why it is such a great perk to take advantage of!
Does it have to be an electric car?
We would recommend you opt for electric as you would be maximising the benefits of the scheme.
Can you get more than one car on a salary sacrifice scheme?
As long as your salary allows it, and the extra salary sacrifice car does not take you below the national minimum wage, then there is no reason why you cannot get more than one car on a salary sacrifice scheme – subject to your employer’s approval.
What happens if I go on maternity leave?
When an employee goes on maternity or paternity leave, their employer is responsible for still providing the salary sacrifice benefit including a car.
The employee can continue to use their company car, and the employer will cover payments for the car if the employee’s pay goes down to statutory minimum amounts.
What happens if I leave the company?
The car lease scheme for employees on a salary sacrifice is a company car, so it is the property of the business. When an employee leaves their job, the car doesn’t come with them.
This will be left to the employer to keep and carry on paying the rest of the agreement costs.
How long is salary sacrifice for?
A salary sacrifice scheme can last from 24 months to 36 months. It can be extended from 36 to 48 months, but a 48-month contract cannot be set in stone at the start.
Does it come with insurance?
Salary sacrifice generally does not come with insurance. However, this comes down to which salary sacrifice provider you use.
OSV offers insurance for your electric car salary sacrifice scheme, along with a home charger and installation, maintenance and servicing.
What should you consider before doing a salary sacrifice scheme?
- Take-home pay will be reduced which could affect how much you can borrow, for example, if you plan to get a mortgage.
- You pay less NI which may affect your state pension; however, this will only happen if your reduced salary takes you beneath the threshold to make NI contributions.
- Strictly, employees have no right to buy the vehicle and will never own it.
- If the employee’s driving licence is revoked due to health, they either must continue payments or they can be covered by insurance. It’s worth looking into getting this covered.
- Although you pay less tax on your salary, you still must pay company car tax on your vehicle. If you are driving a low-emissions car, like an electric then this will be a much lower tax band compared to that of petrol or diesel.
At present (2023) EV drivers pay a 2% benefit-in-kind rate, which is 2% of the vehicle cost.
If you were to opt for a petrol or diesel car, this could go right up to a 37% benefit-in-kind (BIK) rate.
Now we’ve gone through what salary sacrifice is, how it works and the most important frequently asked questions about salary sacrifice. Are there any questions we’ve missed? If so, share them in the comments below!
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