There are loads of different ways to buy or lease a new car, but one you might not have heard of is a salary sacrifice. It’s not available to everyone, only those people who work for a company that offers it, but for many people it can be a way to save some money. You pay a monthly fee for the car taken out of your salary before tax, so if you choose it over a normal lease it could save you money.
If you’re wondering about a salary sacrifice scheme, it’s probably because you’ve been offered one as part of your employer’s benefits package. If not, you can check with the relevant department to see if it’s something they are able to offer to you.
Electric cars are a popular option as employers team up with green leasing companies to be able to offer employees a more sustainable method of transport for commuting. Since electric cars tend to be a little more expensive than petrol or diesel cars – at least for now – the small saving you get through salary sacrifice can mean an EV is finally affordable for you.
Leasing a new car via salary sacrifice isn’t for everyone, though. There are a few drawbacks, the main one being that you’re restricted on what you can choose, and the savings might not be all that much, since you’re still subject to tax on the benefit (BIK tax). Read on to find out if it’s right for you.
What is a salary sacrifice car?
A salary sacrifice car scheme is a partnership between your employer and a third-party supplier. Through your company you can pay monthly for a car with salary sacrifice rather than paying yourself; the money is deducted from your pay before it’s taxed. It’s not the same as a company car, where the employer pays for the car. Here you pay for it and are responsible for it as well.
However, it’s important to note that a salary sacrifice car is still taxed like a company car under a system known as benefit-in-kind (BIK). This is an additional tax charged monthly and based on the value of the car, its CO2 emissions and your personal income tax bracket. You can read more about BIK in the link above.
Electric car salary sacrifice scheme
Electric cars salary sacrifice schemes can be the most cost-effective. That’s because you have to pay BIK tax on any company car out of your net pay, after salary sacrifice deductions, and EVs attract a much lower rate.
In the 2024-25 tax year, you pay just 2% BIK on any EV. By contrast, BIK on a plug-in hybrid is at least 5%, while it’s over 20% on petrol and diesel cars. Those percentages will increase over the coming years (for EVs as well, but they will remain the cheapest to tax).
Is salary sacrifice worth it for a car?
The main benefit of salary sacrifice is you are able to obtain a brand-new car, which you might not otherwise be able to afford, for an all-inclusive monthly fee. New cars are generally more reliable, safer and cheaper to run. You also get a manufacturer warranty, plus support from the vehicle’s provider in the event that something goes wrong.
Most agreements include VED (Vehicle Excise Duty), insurance, roadside assistance and maintenance – be sure to check with your employer. If so, the only day-to-day running cost that you have to pay directly out of your own pocket is fuel – or the cost of charging, if you get an electric car.
If you choose the right car (read on to find out how), the costs can be lower than if you were to fund the car yourself. Unlike a personal leasing contract or PCP finance, there is no initial payment or deposit to pay so you can get the car straight away.
Are there any downsides to salary sacrifice?
In short, yes. Because of the BIK tax penalty, the cost of obtaining a car that has higher CO2 emissions like a sports car, SUV or hot hatch can be higher than funding one yourself. There is also less choice – you’re limited to what’s available through the scheme rather than what you really want or need. If what you need is available, though, then that obviously doesn’t apply.
Once you agree to a salary sacrifice you are locked in for the duration of the contract, unless you leave your job – at which point you’ll have to give the car back. Because the cost of the car is taken from your salary, there is no flexibility if you can’t afford to make the payment.
Your net salary will also be lower, which could affect your ability to get mortgages, loans or other forms of finance. Also, as the car is leased you will have to give it back at the end of the contract and you’ll either need to start a new salary sacrifice agreement or fund a new car with an alternative method.
How much will a salary sacrifice car save me?
It entirely depends what scheme your employer operates. Once you have access to the list of vehicles available, lease rates and included benefits, you can start to work out what it will cost you each month and how much you may be able to save. Don’t forget to include the cost of BIK tax for the duration of the contract, as the current rates increase periodically.
You also need to calculate how much you would spend on insurance, VED, servicing, MoT tests and other associated costs if you were to fund a car yourself. Make sure the company that operates your employer’s scheme provides you with an accurate overview of the anticipated costs before you decide to go ahead.
- Visit our car tax advice section for more expert advice
