One such option for UK employees is purchasing a car through a salary sacrifice scheme. While this arrangement offers potential tax and National Insurance savings, it’s essential to understand both the benefits and the possible downsides before deciding if it’s the right fit for you.

So, is using a salary sacrifice scheme to buy a car a good idea today in the UK? Let's take a closer look.

What is a Salary Sacrifice Scheme?

In a salary sacrifice scheme, you agree to give up a portion of your gross salary in exchange for certain benefits—such as a car, cycle-to-work schemes, or pension contributions.

When used to buy a car, this setup allows you to lease a vehicle and pay for it directly from your pre-tax salary, potentially reducing your tax and National Insurance contributions.

These schemes are often offered by employers as a perk, making new cars, particularly electric vehicles (EVs), more accessible.

How does It work for cars?

When using a salary sacrifice scheme to get a car, the process is relatively simple. You choose a car, often from a list provided by your employer or the leasing company, and the cost of the vehicle (including insurance, maintenance, and road tax) is deducted from your gross pay over a set period, typically two to three years.

At the end of the lease, you can either return the car, lease a new one, or sometimes purchase the car outright.

The primary advantage comes from the tax savings: because the sacrifice is made from your gross salary, your taxable income is reduced, which means you pay less in income tax and National Insurance.

What are the Key Benefits?

Tax Savings:

The main appeal of salary sacrifice is the tax savings.

Because the car payment is made before income tax and National Insurance are applied, you effectively get a discount on the overall cost.

Higher-rate taxpayers stand to gain the most, as the savings are proportional to the tax band you fall into.

Lower Costs on Electric Vehicles (EVs):

One of the biggest perks of salary sacrifice today is its synergy with electric vehicles.

The UK government has incentivised the adoption of EVs by offering reduced Benefit-in-Kind (BIK) rates.

For the 2024/2025 tax year, BIK rates on EVs are just 2%, making this an exceptionally affordable way to drive a new electric car. If you’re environmentally conscious and looking to go green, this could be a fantastic opportunity to reduce your carbon footprint while saving on costs.

All-Inclusive Packages

Many salary sacrifice schemes for cars are all-inclusive, covering insurance, maintenance, breakdown recovery, and road tax.

This means fewer financial surprises, as you’ll have just one fixed monthly payment to worry about, potentially making budgeting easier.

No Credit Checks

Since the car is leased through your employer, there’s usually no need for a credit check. This could make car leasing accessible to individuals who may struggle to get credit approval through traditional leasing routes.

Things to consider

Impact on Other Benefits:

Salary sacrifice reduces your gross income, which could affect other salary-linked benefits, such as pension contributions, bonuses, and statutory payments (like maternity or paternity pay).

If reducing your taxable income brings you below a certain threshold, it could also impact your eligibility for benefits like tax credits.

While salary sacrifice offers savings, you’ll still need to pay Benefit-in-Kind tax on the car.

This tax is based on the car’s CO2 emissions, with higher-emission cars attracting higher BIK rates. For petrol or diesel vehicles, the BIK rates are significantly higher, making EVs a much more attractive option in these schemes.

Employment Dependency

Since salary sacrifice is offered through your employer, you’ll need to stay with your current employer for the duration of the lease. If you change jobs or leave the company, the agreement typically ends, and you might have to pay an early termination fee, which can be substantial.

Salary Thresholds

There are restrictions on how much you can sacrifice. Your post-sacrifice salary must not fall below the National Minimum Wage. This could limit the amount some employees can sacrifice, particularly those on lower incomes.

Is It a Good idea in 2024/25?

Whether a salary sacrifice car scheme is a good idea depends largely on your personal circumstances and priorities.

If you’re a higher-rate taxpayer, keen on driving a low-emission or electric vehicle, and your employer offers a competitive scheme, the financial benefits can be significant.

In today’s market, where electric vehicle incentives are strong, and the cost of owning a car can feel overwhelming, salary sacrifice presents an affordable and flexible way to access a new car.

The savings on EVs, in particular, can be quite substantial due to the low BIK rates.

However, if you’re not planning to stay with your employer for the next few years or have other financial priorities, the commitment may not be as appealing. You should also carefully consider how the scheme might impact other aspects of your compensation package, including pension contributions and potential statutory benefits.

Conclusion

For many employees in the UK, using a salary sacrifice scheme to buy a car especially an electric one can be a cost-effective and tax-efficient solution. The combination of tax savings, fixed costs, and ease of budgeting makes it an attractive option for those looking to drive a new, environmentally friendly vehicle.

That said, it’s essential to weigh up the pros and cons in the context of your personal situation. Consider your career plans, the impact on your overall compensation, and the type of car you’re interested in before deciding if this scheme is the right route for you

If the numbers add up, a salary sacrifice scheme could be a great idea for you today!

TYSONCOOPER are personal and fleet management specialists and can support you with up to date market knowledge and analysis.

If you want some help and advice, get in touch and we can go through the options as they relate to your personal circumstances.