Salary sacrifice car schemes: what are they and how do they work?

With so many ways to drive a new car, it can be confusing to know which is the most financially astute for you. One method is a salary sacrifice car scheme, which uses a portion of your pre-tax income to fund the car through your employer.

A salary sacrifice car scheme is best suited to those choosing an electric car or low emission vehicle, but can be used for other cars. Is it the right choice for you? Read our guide to find out.

What is a salary sacrifice car scheme?

As the name suggests, you sacrifice a part of your gross salary to pay for a new car. Unlike a lease scheme, where the money comes from your take-home pay, a salary sacrifice car scheme deducts the money from your pre-tax income.

Although this can look like a larger sum of money, there are benefits, because you can save on tax and National Insurance Contributions as your salary moves to a lower tax bracket, while getting behind the wheel of a new car at the same time.

For employers, the salary sacrifice car scheme has tax advantages and is a means to attract staff to their business with the lure of driving a better car than they might have expected.

What are the benefits of a salary sacrifice car scheme?

The big appeal of a salary sacrifice car scheme to employees is there is no upfront initial payment or deposit. You simply start leasing the car through your employer with a flat rate taken from your pre-tax salary each month. This is usually less than it would cost to lease the car directly from a dealer or finance provider, and allows most salary sacrifice car scheme users to drive a better car than they might otherwise be able to fund.

A salary sacrifice car scheme usually includes all running costs except fuel. As with a company car, the scheme will include road tax, insurance, servicing, maintenance and breakdown cover. This is all dealt with by your employer and the deal they have with a lease firm, so you just get in and drive.

A big attraction of salary sacrifice car schemes for companies is that it removes the juggling act of who gets which car. Instead of the company deciding car allocation, and risking upsetting some employees, it is up to the employee to choose their car through the scheme. 

What are the downsides of a salary sacrifice car scheme?

A salary sacrifice car scheme means your salary is lower than it would be on paper if you chose to lease a car directly, even though your disposable income after car costs could be higher. A lower salary could affect how much you can borrow for a mortgage or loan.

A lower salary can also have a bearing on your life insurance, which is usually worked out on salary. It can also mean you miss out on a refund of pension contributions with a defined benefit pension scheme if you leave a job within the first two years, because a salary sacrifice car scheme counts as employer contributions.

If you earn the National Minimum Wage, you won’t qualify for a salary sacrifice car scheme, as the rules don’t allow your salary to drop below the minimum threshold after deductions. You may also lose out on some benefits, such as Statutory Maternity Pay, if your salary drops below a certain threshold.

Lastly, there may be a limited choice of cars depending on what is available through the lease provider for your employer’s salary sacrifice car scheme.

Thinking about leasing? Read our guide to the pros and cons of leasing a car...