What are the disadvantages of salary sacrifice car schemes?
Salary sacrifice car schemes are the new kid on the block, and although they have many attractive advantages, what are the disadvantages of salary sacrifice car schemes?
The downsides of salary sacrifice completely depend on the scheme you choose. Some may only offer a limited number of cars; usually valuable resources and an employee portal is available but this isn’t the case for all salary sacrifice car schemes.
When shouldn’t you take part in a salary sacrifice scheme? Why is it better suited for electric cars? And, when is salary sacrifice simply just not worth it? Read on for everything you need to know…
Disadvantages of Salary Sacrifice for Employees
When shouldn’t you take part in a salary sacrifice car scheme?
So, perhaps you’ve heard the benefits of a salary sacrifice car scheme, such as saving up to 40% in taxes. Who wouldn’t want to save money?!
Whilst these benefits are tempting, it’s important to consider when you shouldn’t take part in a salary sacrifice scheme.
Need flexibility
If you are someone who is often quite indecisive and changes your mind, it’s vital to remember that an employee cannot hand the car back if they change their mind about the car.
We would recommend thoroughly researching beforehand to get an idea of what you like. Consider what your needs are and what you want to be getting from a car that you will be driving every day. A good place to start is watching car reviews.
Lower incomes
If you have a lower income, then it’s likely a salary sacrifice car scheme won’t be ideal for you, as it could take you below the minimum wage. You should also consider any other big payments you are making such as a mortgage, loans or rent, and how another payment on top would affect your day-to-day lifestyle.
Reduction of salary
If taking part in a salary sacrifice car scheme were to reduce your salary below the minimum wage threshold, then not only are you not allowed to partake in the scheme, but it also would be an extremely irresponsible idea.
Why is this?
Reducing your salary could impact a few things including:
- Credit or mortgage applications
- Pension amounts
- Life cover offered through work
- Level of maternity pay you receive
It’s vital you consider all aspects and consider whether this is suitable for you.
Intention to buy
If you are intending to purchase the car at the end of the agreement, then a salary sacrifice car scheme is not ideal for you.
Nearly all schemes do not offer a purchase option at the end, and if they do, the value of the car cannot be known until the final month of the agreement.
On the plus side, a salary sacrifice car scheme means not worrying about the depreciation of the value of the car.
Instead of worrying about this, you can look forward to getting a brand-new car after the scheme.
Restricted mileage
If your daily commute or annual trips often vary, and predicting your annual mileage is tricky, it’s important to know that in a salary sacrifice car leasing scheme your mileage is limited.
You usually sign up and agree to a set number of miles per year, and this can be between 5,000 and 40,000 miles a year, most salary sacrifice cars are relatively low mileage at around 7,000 miles a year.
Drivers do have the option to increase their mileage by paying a little more each month, and the agreed annual mileage may be altered during the agreement.
However, this is at the discretion of your finance provider, so you would need to contact them to request amending the annual mileage.
Most do not allow drivers to amend the mileage within the first 12 months of the contract, but we would advise contacting the finance house directly to understand their terms and conditions.
Why shouldn’t you do salary sacrifice on a petrol or diesel car?
It’s likely you’ve heard a lot about salary sacrifice car schemes on electric cars more than petrol and diesel models. There is good reason for it.
Electric cars have an outstanding number of pros when you get one through salary sacrifice.
Even without salary sacrifice, EVs promise reduced maintenance and charging costs, ULEZ (Ultra Low Emission Zone) and CAZ (Clean Air Zone) exemptions and much more.
Through salary sacrifice, electric cars return a much much lower BIK (Benefit-In-Kind) rate than their fuel counterparts.
Currently, as of 2023/2024, EV owners are expected to pay 2% BIK. For diesel and petrol drivers, this goes right up to 37% BIK.
That’s less money in your pocket, and more CO₂ in the air.
Disadvantages of Salary Sacrifice for Employers
When would salary sacrifice not be worth it?
So now we understand how salary sacrifice can affect your finances, and how it is better suited for electric cars, how about when salary sacrifice would not be worth it?
Employee leaves
Life can be unpredictable; changes happen and sometimes employees leave. What does this mean for the employer?
This can leave employers with ‘debt’ as such, as they are responsible for the remaining costs of the car.
What can the employer do when this happens?
They can either continue to pay the monthly payments OR they can pay an early termination fee.
An early termination fee is the responsibility of the employer. However, employers can protect themselves from this risk with ETI and a good salary sacrifice policy.
OSV offers an attractive Early Termination Insurance (ETI), ensuring you are covered for all areas of changes – subject to terms and conditions.
What does ETI cover?
- Resignation
- Long-term sickness absence
- Accidental death
- Maternity
- Adoption and paternity
- Loss of licence on medical grounds
- Maternity/paternity/adoption leave
- Expatriation
It’s worth noting you cannot claim ETI within the first 3 months of your contract, and the first 9 months for maternity, adoption and paternity leave.
Another note for employers; when an employee takes maternity, adoption or paternity leave, the employer must continue to provide the vehicle.
Why is this?
The employee will receive statutory pay for their leave, and the salary cannot be sacrificed from this. So, the employer must cover the costs of the vehicle throughout the time the employee is on leave.
Should you sign up to a salary sacrifice car scheme?
Now that we’ve gone through the cons of salary sacrifice when getting a car, does this sound like something appealing to you? Remember, a salary sacrifice car scheme is only available once the employer has signed up for one.
If the disadvantages haven’t put you off, and this does sound like something valuable to you, OSV can help.
Many suppliers assume employers have a fleet team ready to manage all the admin and paperwork, and often don’t offer the help. OSV’s salary sacrifice scheme is designed to take the weight of your shoulders.
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