Why salary sacrifice car schemes are worth it

Deciding how to finance your new car is a major decision that you want to get right. With so many options available you could feel spoiled for choice. So what range of benefits can a salary sacrifice agreement offer you in addition to the car itself?

Of course you need be sure a salary sacrifice scheme is right for you. That’s why we’ve created this guide that explains what a salary sacrifice arrangement is, how it works and what benefits you get out of it in addition to a brand new car.

So, if you’re wondering: “Are salary sacrifice car schemes worth it?”, this article is for you.

Salary sacrifice cars = bankable tax benefits

Electric cars have 0% BIK between April 2020-2021, rising just 1% each tax year until 2023.

If you didn’t have to pay tax on any of the money you earned you’d be much better off. While salary sacrifice car schemes can’t relieve you of the tax burden for your entire salary, they do offer you the chance to forgo all or some of the tax on a portion of your salary.

Salary sacrifice schemes work by allowing employees to trade part of their pre-tax salary for goods or services. In most cases, working out how much you’ll save is as simple as multiplying the amount of salary you’re sacrificing by your tax and national insurance contribution rate.

For example, if you sacrificed £100 of your wage to be paid into your pension each month you’d save 20% as a basic rate taxpayer and 10% in National Insurance (NI) – a total of £30 per month. For a higher rate taxpayer it would be 40% and 2% NI or £42 saved in tax.

However, cars work slightly differently. The extent of the tax break you achieve will depend on the type of car you choose with the maximum saving equivalent to your income tax rate of 20, 40 or 45%.

During the 2020-2021 tax year, you could either keep all or a portion of this saving depending on the emissions of the car you choose. Cars with zero emissions – electric cars – have a 0% benefit-in-kind (BIK) applied to them between April 2020 to April 2021, which rises just 1% each tax year until 2023. More polluting cars are subject to a higher benefit-in-kind rate which will reduce the tax saving you’ll make.

The key benefits of salary sacrifice

There have been a number of changes to salary sacrifice over the last few years which has caused confusion, and created a range of misconceptions.  However, there are so many benefits to this salary sacrifice car schemes and so we’ve highlighted some of the key facts below;

1. You can make tax and national insurance savings

Opt for an electric car and from April 2020 to March 2021 you’ll attract a benefit-in-kind (BIK) rate of 0% on the amount of salary you sacrifice. That means you’ll enjoy the full income tax saving available. In the following tax year your payments will be subject to 1% BIK but you’ll still enjoy a significant reduction in the monthly amount you pay.  Salary sacrifice is certainly the most affordable way to drive an electric car.

Of course, electric cars and those with high emissions are the two extremes and there are plenty of cars in between to choose from, most of which also offer tax savings. A good rule of thumb is that the lower the car’s emissions, the greater the tax saving you’ll make.

Although the government’s tax rules are designed to encourage drivers to choose low emission vehicles, tax savings remain for non-low emission vehicles. The BIK will nearly always be less than the tax saving, except for the most polluting cars. So it’s still possible to opt for a large petrol or diesel car with high emissions if that’s your preference.

2. There’s a huge variety of cars

There are hundreds of makes and models that can be taken via salary sacrifice. We work with leading UK manufacturers and supply a huge array of cars across pure electric, hybrid, petrol and diesel.  More often than not if it’s available in the retail market, you can get it through a salary sacrifice scheme.

Choose from the smallest city cars, hatchbacks and saloons to estates, SUVs and high-end luxury cars. All come with the latest technology and a range of trim options giving you flexibility over what’s in your new car.

3. You won’t necessarily lose out on a wide range of other employee and state benefits

Sacrificing part of your salary means your gross pay is reduced which could affect items like pension contributions, life cover payouts, parental leave payments or mortgage applications. However, some organisations calculate employee benefit-related payments using a ‘reference salary’ which ignores the fact that you’ve sacrificed some of your salary. Check with your employer to understand their approach so you can decide, will salary sacrifice work for you and your current circumstances?

It’s also worth knowing that reduced taxable earnings could impact your state pension or any contribution-based government benefits like jobseeker’s allowance or employment and support allowance. Many people will earn more than enough to make sufficient contributions to receive these benefits in full. But, if you’re a low earner, it’s worth understanding the impact that salary sacrifice could have on your entitlement to state support. On the up side, if you qualify for tax credits, you could find that salary sacrifice arrangements mean you’re entitled to more.

4. Salary sacrifice cars do more than save money

Car ownership can be stressful. The cost of MOTs, regular servicing, tyres, repairs and insurance can all mount up, dip into your savings or rack up the credit card.

With car salary sacrifice, all this stress and unexpected cost disappears because your monthly payroll deduction covers the finance for your car plus a complete care package that makes driving super convenient.

This is what’s typically included in a car scheme:

• Insurance and road tax
• MOTs
• Servicing
• Maintenance
• Repairs
• Replacement tyres
• Breakdown cover
• Lifestyle protections for unexpected events like redundancy or long-term sickness
• Home delivery

The best providers also offset your carbon emissions on vehicles with an internal-combustion-engine making your car carbon neutral. And, as we discuss in the next section, you can also enjoy protections that guard against changes in your personal and financial circumstances.

Salary sacrifice car or buy outright?

Buying outright might seem like the cheapest way to drive a new car but once you’ve added up all the bills, servicing, new tyres and other running costs, you can be hundreds of pounds down even if nothing goes wrong.

Salary sacrifice car schemes can place your ideal car in your reach

And saving up to buy a car can be a challenge. For most people, budgets are tight which makes it difficult to save more than a little each month. Meanwhile, the work needed to keep your current vehicle going eats into your savings placing your new car a long way down the road.

In these circumstances, when it’s a choice between a salary sacrifice car and buying outright, salary sacrifice cars win because they provide a way to break the cycle. Instead of paying money into your savings account only to take it out to pay for repairs, a set monthly amount is taken from your pay to cover a reliable car, its MOT, servicing, insurance, breakdown cover, repairs and more.

Because salary sacrifice car providers at times order large numbers of cars, they secure great manufacturer deals as a result which you can’t access as an individual customer on the forecourt.

And with salary sacrifice offering the chance to make the most of every pound, you could even find you can afford to drive your dream car, not just any old car.

The bottom line

Car salary sacrifice schemes are an extremely valuable benefit for employees with substantial savings available on electric and low emission cars. And significant savings are also available on cars with higher CO2 that have low whole-life costs.

Beyond the financial savings, salary sacrifice car schemes also offer a range of benefits you won’t find elsewhere including comprehensive motoring support packages, emission offsetting and financial protections.

Choosing the right provider is key to securing the best, market-leading packages that will make the most of your hard-earned money while making driving a hassle-free, convenient experience.