What is salary sacrifice and how does it work?

Posted by: Vertu Lease Cars, 10th Oct 2023

What is salary sacrifice and how does it work?

How does salary sacrifice work?

If you want a new car bundled up as part of a new job, you might’ve been offered a salary sacrifice scheme. It’s a great way of getting behind the wheel of a new vehicle, particularly if the firm you’re working for doesn’t include a company car.

But what is a salary sacrifice scheme, how does it work and could it be the right fit for you? We’re going to go through the details today.

So what is a salary sacrifice scheme?

Salary sacrifice works by allowing you to ‘sacrifice’ a certain portion of your salary each month in return for a new car. This amount is also taken before tax is applied, so you can save on income tax and National Insurance contributions by purchasing a car via your company.

Essentially, your employer will have entered into an agreement with a third-party vehicle supplier. The cost of the vehicle is then taken away from your salary each month.

How is this different to a company car?

A company car is one which is paid for and maintained by the business you work for. In this instance, the business is responsible for the vehicle’s upkeep.

However, with a salary sacrifice scheme, the vehicle is essentially ‘yours’, so you need to make sure that it’s kept maintained.

Does a salary sacrifice vehicle still require company car tax?

Yes. A salary sacrifice vehicle is still eligible for company car tax, which is often referred to as benefit-in-kind.

Benefit-in-kind sees a vehicle that is available for private use as an extra benefit. It’s based on the car’s CO2 emissions and its list price - including extras and VAT - so you’ll need to calculate this beforehand to ensure that the monthly payments aren’t too high for you to deal with.

Will other aspects of the car be included in my payments?

That’s right. Most salary sacrifice schemes offer quite a wide-spanning variety of inclusions, such as servicing and maintenance costs as well as insurance and breakdown cover. It’ll all be tied into your monthly payments so, once agreed, there’s very little to worry about once you’ve got the keys.

Once you’ve agreed, however, you will be locked into the full term of the contract.

Do I get to keep the car at the end of the term?

No. Because the car is on a contract hire agreement, once you reach the end of your term you’ll simply hand it back and start a new salary sacrifice setup.

This does mean that you’ll be able to get into a brand-new car quite often and swap into a different model. Remember too that you’ll have to pay if there is any damage to the car, while excess mileage - over the agreed amount - will mean an additional charge too.

Do I need to pay to fuel and charge the car?

Yes. You’ll be responsible for the costs associated with charging or filling up your car. However, business fuel can be expensed with up to 45p per mile in tax-free allowance.

However, with rising fuel costs this might make a petrol or diesel car less attractive. As an option, electric vehicles incur a lower benefit-in-kind cost, which could help to make the monthly outgoings a little more approachable.