Salary Sacrifice vs PCP: Which is right for you?

Salary Sacrifice or Personal Contract Purchase are two popular ways of getting a new car, mostly due to the cost-effectiveness of both options. They both have their benefits, but one may be better than the other depending on your individual circumstances, so let’s break down both to help you work out which is right for you:

What is Salary Sacrifice?

A Salary Sacrifice Car Scheme is an employee benefit that has to be offered through your employer. In essence, you are giving part of your gross salary (in other words, before tax) in exchange for a non-cash benefit – in this case, a fully insured and maintained car.

It’s grown in popularity in recent years as a cost-effective way to drive a car, as the contribution is made from your taxable income, unlocking money that would otherwise be paid to HMRC.

Generally, it’s inclusive of road tax, insurance, breakdown cover, and other maintenance costs, which means even more savings for you. Salary Sacrifice companies also have the power to acquire cars in bulk from manufacturers, meaning the price is often lower than you’ll pay at a dealership.

Salary Sacrifice car schemes are subject to a Benefit in Kind tax, but this is negligible if you choose an EV so you get to keep the majority of the Tax and NI savings.

Salary Sacrifice car schemes are great for a few reasons:

• You get access to a fully insured and maintained car
• You don’t have to put down a deposit
• Your road tax, insurance, breakdown cover, and maintenance are often included
• You’ll save on your Tax and National Insurance contributions
• It’s an accessible way to drive an electric car, for even more savings
• A fixed monthly contribution means you can budget ahead

Additional Salary Sacrifice benefits for employers include:

• Reduce national insurance amounts
• Reduce fleet emissions with easy EV adoption
• Increase employee retention
• Improve the overall benefits package

(As an employer, you’ll also reduce the number of employees using unreliable or unsafe vehicles for work.) Learn more about grey fleet, here.

What is Personal Contract Purchase?

Personal Contract Purchase (often called PCP) is a more traditional form of car finance, which is taken between you (the driver), and the manufacturer, dealership, or other car supplier – as a result of this, it’s open to everyone and not just directly through their employer.-

Your monthly payments cover just the depreciation of your car, so it might be lower than you’d expect – especially on those cars that hold that value very well – and definitely lower than Hire Purchase options, where you are paying off the entire cost of the car plus interest!

PCP is quite simple: you’ll pay a deposit, agree a contract length (usually 2-4 years), and pay monthly for the car. At the end of your agreement, you’ll have three options: Hand back the keys and end the contract; hand back the keys and renew the contract with a new car; or pay a final balloon payment and keep the car, this is determined at the beginning of the contract so you will know this sum in advance.

There are a few key differences between PCP and Salary Sacrifice:

• PCP payments are made on your net salary, so you won’t be saving on tax and National Insurance
• PCP requires a deposit, unlike salary sacrifice
• Maintenance, insurance, tax, and breakdown cover are often not included so will be additional costs (paid from your Net salary) in addition to the car finance payments.
• PCP is open to everyone, not just those whose employers offer a salary sacrifice car benefit scheme

Salary Sacrifice vs PCP at a glance

Is Salary Sacrifice better for me?

Salary Sacrifice might be a better option to you than PCP if:

• You want to save on your Tax and National Insurance
• You want an all-inclusive package for your car, insurance, tax, and maintenance
• You want a fixed monthly amount and no unexpected bills
• You want easy and cheaper access to an EV
• You don’t want to pay any upfront costs

Is PCP better for me?

Personal Contract Purchase might be a better option for you than salary sacrifice if:

• You don’t mind paying an upfront deposit or potential balloon payment
• You’re self-employed or your employer doesn’t offer a salary sacrifice scheme
• You prefer to organise your own insurance and maintenance
• You’re not concerned about passing a credit check

Salary Sacrifice vs PCP

Both Salary Sacrifice and PCP offer significant advantages. Salary Sacrifice is great for employees who want low-cost, hassle-free access to a new car, especially an EV.

PCP is a great option for those who don’t have access to a Salary Sacrifice scheme or prefer to organise their own running costs like tax and insurance.

Glossary

• Salary Sacrifice: A benefit scheme offered by employers that offers a non-cash benefit in exchange for a contribution of your gross salary – in this case, a fully insured and maintained car.
• Personal Contract Purchase (PCP): A form of personal car finance agreed between the driver and supplier (dealership, manufacturer, etc).
• EV: Electric Vehicle.
• Balloon Payment: A large, end-of-contract payment for Personal Contract Purchase drivers that allows them to keep their vehicle at the end of their contract.
• Benefit in Kind (BiK): A tax paid on a non-cash benefit, such as a car. To learn more about Benefit in Kind tax for company cars, click here.
• Gross Salary: Your salary before deductions, such as Tax, national insurance, or pension.
• Net Salary: Your salary after deductions, such as tax, national insurance, or pension.