The internet is often our first port of call for information. However, not everything you read online is true, particularly when it comes to car salary sacrifice. We’re here to expose the fake news we’ve found online and set the story straight by busting the myths around salary sacrifice cars.
Myth 1 - “Since the changes in car tax rules, salary sacrifice cars are expensive.”
This post found on the social platform, Reddit, is definitely not true - all that’s changed is the tax treatment. A driver taking up a car with emissions of more than 75g/km CO2 will either:
- pay the benefit-in-kind tax on the car
- the income tax on the amount of salary being sacrificed if that’s the greater amount
Despite some of the negative online chat, NI savings are untouched. And manufacturer discounts are also often available through the biggest employee benefit car providers. You can still benefit from great savings, particularly if you opt for a car with CO2 emissions below 75g/km.
It’s true that ultra-low emission vehicles (ULEVs) will become more attractive cost-wise once the new 2020/21 benefit-in-kind (BIK) tax rates kick in. The cleanest cars will attract even more significant incentives with BIK tax at a lowly 2%.
However, cost savings are only a proportion of the reason you’ll get a car through a company car scheme: it’s the convenience of the all-inclusive package that attracts most drivers. And car benefit schemes provide this in spades.
Myth 2 - salary sacrifice car choices have narrowed
There’s still an enormous choice of salary sacrifice cars available. Whether you want a vehicle with a massive engine or a fully electric car with no emissions whatsoever, there’s something available for you.
The ball is firmly in your court when it comes to choice and providers are offering a wide selection complete with all the features and benefits that come with a company car scheme.
Myth 3 - salary sacrifice always impacts your workplace pension
“I believe salary sacrifice is the cheaper option in terms of what a benefit car actually costs but it could affect pension contributions and impact my final salary pension.” - Reddit post
Why would someone on Reddit think this is the case? Because entering a salary sacrifice arrangement reduces your take home pay because you’ve agreed to exchange some of your pay for a benefit instead. Therefore, it’s natural to assume that this lower salary figure will be used to calculate salary dependent benefits like your pension.
Whether salary sacrifice impacts your pension or not will depend on the pension scheme your employer operates and its rules.
Some employers choose to create what’s called a ‘notional’ or ‘reference salary’ which is used for such calculations.
This notional salary is your pay rate before any salary sacrifice arrangements. So, if your salary was £30,000 before a car salary sacrifice (or any other salary sacrifice), this is the figure your employer will refer to when calculating other benefits like pension contributions and, in some cases,over time and pay rises too.
Confirmation of this approach comes from HMRC which states: “Often, employers will use a notional level of pay to calculate employer and employee pension contributions, so that employees who participate in salary sacrifice arrangements are not put at a disadvantage.”
However, other pension schemes, particularly defined benefit pensions - like career average schemes - will be impacted. That’s because employers look at an individual’s average pay over the course of their career and calculate the pension on that basis. A reduction in pay via salary sacrifice will reduce your average earnings across your career and therefore your pension.
If you’re in a final salary pension scheme, salary sacrifice will only impact your pension if you exchange (and therefore reduce) some of your salary in the years before retirement or leaving the organisation. This would impact your final salary on which your pension calculation is based.
Does this mean it’s not worth taking up a car via salary sacrifice if you’re in a final salary pension scheme? Not necessarily.
A salary sacrifice car could be vital to helping you get to work and earn a wage and accrue a pension. And, if the arrangement is better than any deal you could get on the high street, what you lose in pension could be offset in savings. Plus, you could always stop any salary sacrifice arrangements pre-retirement or leaving the organisation to ensure your final salary is at its highest.
There’s a lot to consider here, so ask your pensions team to calculate the impact on your pension and compare this with the savings you’ll make via salary sacrifice. And ensure you understand how many years salary are taken into consideration when calculating your final salary for pension purposes. This way, you’ll be armed with the facts to help you make the right decision.
Myth 4 - salary sacrifice means you’ll struggle when applying for a mortgage
Your notional salary isn’t only used to calculate compensation or benefits. Your employer is also likely to use it to provide confirmation of your earnings if you apply for a mortgage.
Of course, these days, your mortgage provider will also check your outgoings to ensure you can afford repayments. And your car benefit will form part of this review.
However, if you secure a good deal and reduce your outgoings by applying for a car with low BIK tax rates, you’ll be getting a great deal. The better your deal, the more spare income you’ll have available which means you’ll be able to demonstrate even greater affordability.
Car salary sacrifice arrangements are still a great benefit, particularly if you choose to take up a ULEV. Before you decide to go ahead, check your employer’s approach to salary sacrifice and understand the impact on your pension.
Then take a look at the great savings you could make on a wide range of low emission vehicles and decide whether car salary sacrifice is right for you.
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