Salary sacrifice schemes can save employees money. But how does the scheme work?

As the demand for electric vehicles rockets in the UK, many employers have opted in to salary sacrifice schemes which can save their employees money. But how does the scheme work?  

Mike Potter, CEO at DriveElectric commented:“The high cost of fuel coupled with the introduction of low emissions zones across the country has resulted in increased demand for electric vehicles. One cost-effective way to get an electric car is through a salary sacrifice scheme with your employer. With benefit-in-kind tax, you can buy an electric car for a cheaper price when choosing salary sacrifice.

 “Getting a car through a salary sacrifice scheme also reduces your National Insurance and income tax contributions since the sacrificed amount is deducted from your income before taxation.”

The experts at DriveElectric have put together a guide on salary sacrifice cars, sourcing the most commonly asked questions about salary sacrifice cars by analysing Google search data from August 2022 - July 2023, as well as revealing how to get a car through salary sacrifice.

 How does salary sacrifice work?

Employees asked Google how salary sacrifice schemes work 28,300 times in the last year, so it’s clearly a topic of interest- but many are unsure of the practicalities.

 In a salary sacrifice scheme, employers partner with third-party car leasing companies to offer employees a vehicle in exchange for a monthly contribution from their salary before tax is applied. With most salary-sacrifice cars, it is the employee's responsibility to maintain the vehicle and pay for repairs. The employer will pay for the car’s insurance for the scheme's duration. The period usually runs for two to four years, and the employee must return the car at the end.

 Is salary sacrifice worth it?

For employers, running a salary sacrifice car scheme is a good way to reduce your environmental impact and boost workplace morale. Encouraging the use of low emissions vehicles has a lasting impact on the environment.

 Employees can save up to 40% on a new electric car when joining a salary sacrifice scheme as the cost of the vehicle lease is taken from their gross salary pre-tax. With benefit-in-kind rates so low for EVs, a salary sacrifice scheme is a way to drive zero emissions, and will save you money compared with a petrol or diesel vehicle on the same scheme. This is because employees must still pay tax on their salary sacrifice car. However, benefit-in-kind tax rates start at 15% for diesel and petrol, compared to just 2% for electric cars. When you join a salary sacrifice scheme, your income tax and National Insurance contributions are also reduced.

Will salary sacrifice affect my mortgage?

In short, it could. While most lenders will only be concerned with your gross annual income, disregarding any salary sacrifice deductions, some could take your lower income into account. By sacrificing a portion of your monthly salary, you will take home less money each month. For some, this could make it difficult to meet mortgage repayments. However, the amount you sacrifice by joining a car scheme should replace your monthly expenditure, leading to a similar budget.

 Does salary sacrifice affect my pension?

If you have a defined contribution pension scheme, the most common type in the UK, your pension will likely be unaffected by joining a salary sacrifice scheme.

 With a defined benefit pension, pension calculations are made after deductions like salary sacrifice. Therefore, those with this type of pension are more likely to be affected.

It is very unlikely that your State Pension will be affected if you join a salary sacrifice scheme as long as your earning exceed the Lower Earnings Limit of £533 a month.

 Do I need to tell HMRC about salary sacrifice car?

You must report your salary sacrifice car to HMRC. This is because salary sacrifice may affect an employee's right to State Pension and Incapacity Benefit if the National Insurance payments are too low. Despite this, your State Pension will not be affected unless you earn below £533 a month.

 DriveElectric has also shared 3 tips on how to get a car using salary sacrifice:

 Choose an electric vehicle

Thanks to the extremely low Benefit-in-Kind tax rates set by the UK Government, employees can be sure they won’t surpass 5% until at least 2028. This makes all EVs extremely attractive compared to petrol and diesel vehicles which attract a significantly higher benefit-in-kind tax rate of around 15%. Savings vary depending on the choice of EV and the income tax bracket of the employee, but potential savings can be in the 20% to 60% range.

 Check your pension is not affected

The best way to confirm the effect of a salary sacrifice car on your pension is to contact HMRC and your employer. Those on a defined benefit pension may see an effect on their income by joining a salary sacrifice scheme, so it is always essential to check before opting in.

 Use a car salary sacrifice calculator

Once you are sure your pension will not be impacted by joining a salary sacrifice scheme, it’s a good idea to use an online calculator to work out the difference in your income tax and National Insurance contributions should you join. This will also calculate the difference in your net pay after joining a car scheme, so you can plan and budget in advance.