Buyer’s guide to car salary sacrifice schemes

Car salary sacrifice arrangements remain a popular employee benefit; in its January 2023 Leasing Outlook, the British Vehicle Rental and Leasing Association (BVRLA) found a 20.5% year-on-year increase in company cars funded through salary sacrifice to quarter three in 2022.

What are car salary sacrifice schemes?

A car salary sacrifice scheme allows an employee to give up an amount from their gross salary in exchange for the use of a car for a period of time.

The employee saves the income tax and national insurance (NI) contributions and the employer makes savings on the amount of salary that has been sacrificed. This makes the scheme an attractive option to employers because they are typically low-cost for the business, with most providers able to manage all aspects of car maintenance, including servicing, breakdown cover and insurance, as well as ongoing communications about, for example, driver and car safety.

How do the schemes work?

Car salary sacrifice schemes tend to follow the same basic principles as other salary sacrifice-type arrangements. A leasing organisation will lease a car to the employer, which will pay the leasing costs and manage a separate salary sacrifice agreement with its employees. The employee selects a car from the leasing firm’s options.

Salary sacrifice schemes are underpinned by various fleet funding options, which employers should fully investigate prior to introducing a car scheme. Options include: contract hire, contract purchase, finance lease, employee car ownership, hire purchase and outright purchase. Historically, outright purchase was the most popular fleet funding method, but recently this has been overtaken by contract hire, which is now the most common form for salary sacrifice arrangements.

However, each funding option has a number of advantages and disadvantages, depending on the nature and needs of an organisation. 

For the employee, they choose a car which fits with their budget and then a fixed monthly amount is taken from their salary for the car, which comes as a package with insurance, servicing, maintenance, replacement tyres and breakdown cover so there are not any surprises.

What are the benefits?

The employee gets a brand new, maintained car at corporate rates, and save most of the value-added tax (VAT) they would pay on a personal lease. If only pure electric and ultra-low emission cars are offered there should be a significant overall saving for both employer and employee.

This arrangement can also enhance the environmental, social and corporate governance (ESG) strategies of an organisation, and help employers to meet their duty-of-care requirements by eliminating grey fleet risk, where privately-owned cars are used for at work mileage. The scheme is a great way of encouraging drivers to adopt more environmentally-friendly modes of transport.

A salary sacrifice arrangement is also seen as key in aiding retention of talent and attraction of new staff.

Are there any tax or legal implications?

Employers can also benefit from the NI savings made by deducting employees’ car payments from their salary. Many organisations choose to reinvest these savings back into their car scheme in order to make the benefit even more attractive to employees.

For staff, salary sacrifice car schemes are a cost-effective way to invest in a car, and not only because of NI savings. They can also reduce the level of tax they pay by choosing a low-carbon dioxide (CO2) emission model.

This is because company car tax is based on a car’s CO2 emissions. The value of an employer-provided car, which must be reported under P11D as a benefit-in-kind (BIK), meanwhile, takes into account the manufacturer’s recommended retail price and VAT, and an employee’s personal tax rate.

BIK is currently just 2% for electric vehicles (EVs), so the savings can be significant for drivers choosing the greenest cars.

This figure will increase by one percentage point per year from 2025 to 2028. The current BIK taxation rate incentivises employees who are looking to transition to an EV through a salary sacrifice arrangement, and in turn, helps providers, employers and the government achieve their net zero goals by decarbonising their fleet vehicles.

Scheme complications

Complications can occur in a car salary sacrifice scheme if an employee goes on long-term sick leave and cannot keep up the repayments on their car, or if an employment contract is terminated, be it through an employee moving on or being made redundant. This may result in an employer having to meet the outstanding costs of the car scheme.

Introducing a car salary sacrifice scheme can also bring extra administration for employers, especially when tax changes occur. Employee contracts will need to be updated in relation to any increase in VAT or NI contributions. However, providers can help organisations work through these administrative details.

What are the current market trends?

The EV market in the UK has gone from strength to strength. According to Zenith, there is a demand for electric vehicle fleets, as employers look to support their ESG agenda. As such, employers are adopting EV-only schemes, and take up is increasing significantly from previous years.

Meanwhile, Loveelectric states that UK drivers are more conscious than ever about their impact on the environment around them. The rise in electric car registrations is no coincidence: switching from fossil fuels to electricity is one of the most positive carbon-efficient actions an individual can take.

Tusker concurs, stating that since 2020, it has seen a huge rise in the popularity of EVs, which made up over 80% of its orders in 2022.

More electric vehicles are being launched every week and new electric manufacturers are entering the UK for the first time. With BIK being kept at 2% until 2025, drivers are able to afford a brand new electric car where they otherwise would not have been able to.

In January 2023, Tesla announced price reductions of around 15% on two of its models, the  Model Y and Model 3; This significant price reduction has a major impact on monthly leases, too. With salary sacrifice offering the most affordable way to drive a new electric car, this price drop means it can offer even lower monthly leases on Tesla EVs.

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Who are the main providers?

ALD Automotive, Alphabet, Arnold Clark, Arval, Fleet Evolution, LeasePlan UK, Lex Autolease, Lookers Leasing, Loveelectric, Octopus Electric Vehicles, Pendragon Contracts, SG Fleet, Tusker, Venson Automotive Solutions and Zenith.