Salary sacrifice is a tax-efficient way to give staff access to company cars. Both employee and employer save on tax and NI contributions

In the post-recessionary economic climate, salary sacrifice means more than you might first think.

At a technical level, company car salary sacrifice is, simply, a mechanism through which an employee makes a legally binding agreement to give up part of his or her gross salary in exchange for a brand new company car. It is much like any other salary sacrifice offer staff might get for, say, childcare vouchers, just bigger - employees are likely to be sacrificing a significantly larger part of their salary.

In the process, employees save on the income tax and national insurance contributions (NICs) they pay, as well as benefiting from their employer's buying power in gaining manufacturer discounts. Ben Creswick, head of business development at provider Zenith Provecta, estimates that employees can expect to save between £70 and £100 a month compared with the cost of obtaining a lease car on the open market.

In turn, employers can make savings through reductions in NI and corporation tax, while the savings employees make should more than offset any increases in benefit-in-kind taxation - all issues we will examine in more depth later in this guide.

Company car salary sacrifice can also be a valuable low-cost or cost-neutral way to maintain employee engagement and loyalty, says Paulo Larkman, head of fleet consultancy services at provider Lombard. "It offers a valuable staff retention tool and addresses the risk posed by use of employees' own cars for business purposes. Interest has soared over the past 18 months."

Also, because many of the benefits of company car salary sacrifice are focused on low CO2-emitting vehicles, it can be a useful tool for boosting a company's environmental credentials. But pairing with the right provider, understanding and mitigating the risks and making a success of its implementation all take careful planning and co-ordination at many levels, as this guide will show.

What is salary sacrifice?

  • Staff give up a portion of salary in exchange for the employer buying a benefit on their behalf.
  • Tax-efficient perks attract tax breaks only when purchased by the employer, not when bought directly by the employee.
  • Savings come through lower levels of income tax and employer and employee national insurance contributions.
  • Salary sacrifice is a tax-efficient way for a wider employee population to gain access to a company car.

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