Key Considerations For A Car Salary Sacrifice Scheme

Frequently asked question

Salary sacrifice car schemes can be an attractive way for businesses to enhance employee benefits while managing costs effectively. By offering cars as part of a remuneration package, both employers and employees can take advantage of potential tax efficiencies. However, implementing such a scheme requires careful planning and understanding of the associated complexities, including tax implications, compliance requirements, and the impact on other employee benefits. This guide will walk you through the key considerations, helping you decide whether a salary sacrifice car scheme is the right fit for your business.

Many businesses look to a salary sacrifice scheme as a way to offer a car as part of a remuneration package. This can be beneficial to both parties but there are some significant areas that need to be address before you consider this:

Have a set policy for all staff

There are many different ways to buy / lease / hire a car through a business – each would attract different complications and tax benefits / pitfalls. To manage expectations and administration it’s best practice to have a set policy. Here are some examples – you could apply some or all of the below:

1. 1. The car must be leased
  2. The Co2 emissions must be less than x
    1. (Or – The car must be electric)
  3. The list price must be less than £x

Update your contracts of employment

You’ll need to ensure that formal agreements are in place to cover possibilities during the period of ownership. Examples include:

1. 1. A policy on what happens if the staff member leaves
  2. A policy on what happens if the staff member is dismissed
  3. A no smoking policy – the vehicle is an extension of the office and subject to the same legislation
  4. A policy on any fines / penalties incurred

Be aware of the hidden costs

The car will be the legal responsibility of the business and therefore not just liable for the monthly leases. It will also be liable for the running costs of the car

1. 1. Tyres and maintenance
  2. Insurance
  3. RFL and MoTs

Use the right mileage rates

Company cars attract different fuel rates to private vehicles – details of the HMRC advisory rates can be found here: https://www.gov.uk/guidance/advisory-fuel-rates

Get the deduction right
The employee deduction will vary depending on the method of acquisition but a common error seen is working through the correct deduction for a car on an operating lease.

Take the following example:

Lease – £500 + VAT

Maintenance – £100 + VAT

Terms – 3 +36

The true deduction needs to include both the initial lease payment – which is effectively a premium – and also the VAT restriction on the lease:

	A	B	C	D	E	F
					B + D	A x E
	No. of payments	Net	VAT	VAT restriction	Total cost (payment)	Total cost (contract)
Initial pay (Lease)	1	1,500	300	150	1,650	1,650
Initial pay (maint.)	1	300	60	0	300	300
Monthly pay (lease)	36	500	100	50	550	19,800
Monthly pay (maint.)	36	100	20	0	100	3,600
Total cost						£25,350
Monthly deduction	£25,350 / 36 months					£704.16

Understanding the Tax Implications

Salary sacrifice car schemes can provide meaningful tax advantages, but it’s vital to fully understand the tax implications before implementing one.

Benefit-in-Kind (BIK) Tax: Employees using a salary sacrifice scheme will pay tax on the Benefit-in-Kind value of the car. This is calculated based on the vehicle’s CO2 emissions and its list price. Opting for low-emission or electric cars can significantly reduce this tax burden, making it an attractive choice for both employers and employees.
Employer National Insurance Savings: By reducing an employee’s gross salary, employers can save on National Insurance contributions. However, National Insurance must still be paid on the car’s BIK value, which should be factored into the overall scheme costs.
Employee Tax Code Adjustments: Employees should ensure their tax code is updated to reflect the car’s BIK value. Failing to do so may result in underpayment issues with HMRC, which could lead to additional tax bills later.

By understanding these points, employers and employees can make the most of the tax advantages while staying compliant.

Communicate the Scheme Clearly

Clear communication is key to the success of any salary sacrifice scheme. Employees need to understand how the scheme works and its potential benefits:

Provide a detailed breakdown of costs, tax savings, and deductions, tailored to each employee where possible.
Share examples of typical salary deductions, including how they are calculated and the expected savings.
Offer tools or resources, such as online calculators or personalised projections, to help employees visualise the financial impact.

Clear and transparent communication builds trust and ensures employees feel confident in their decision to participate.

If you need help with this, or with other advice, then please get in touch with our accounting team.

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