Salary Sacrifice: Frequently Asked Questions

Salary sacrifice enables employees to exchange some of their pre-tax salary for a choice of attractive benefits, such as childcare, pensions and health insurance, often at discounted rates that they usually wouldn’t be able to access as individuals. They’re an effective way to recruit, motivate and retain staff, and extend some of the perks of a company car to other employees.

Recent tax reforms have also made salary sacrifice one of the most affordable ways to drive an electric car and caused a significant uptick in demand. The BVRLA’s latest data shows the UK’s salary sacrifice fleet doubled (to 62,545 cars) in the two years to Q4 2023, while 96% of new deliveries were plug-in hybrid or electric vehicles – most (87%) are the latter [1]. Here’s why.

The process is simple. Employees select a car from a list, their employer leases it on their behalf, then deducts the monthly rental cost (including road tax, insurance, maintenance, accident management and breakdown cover) from their pre-tax income. They then pay income tax and National Insurance contributions (NICs) on what’s left of their salary, and Benefit-in-Kind for the use of the car.

Benefit-in-Kind is paid at the same rate as driver’s income tax band (usually 20% or 40%) and the car’s ‘taxable value’. Reforms in 2017 introduced a two-tiered way of calculating the latter, reserving the biggest incentives for vehicles emitting 50g/km CO2 or less – that’s a group comprising plug-in hybrid and all electric vehicles.

Up to that threshold, the taxable value is calculated like a company car – a percentage of the list price (P11d) weighted according to its CO2 emissions and (between 1-50g/km) its electric range. Otherwise, for cars emitting more than 75g/km, drivers will be taxed on the greater of either the tax due on the salary foregone, or the benefit-in-kind due based on the taxable value of the vehicle. [2].

New company car tax bands, introduced in 2020, have strengthened those incentives. The taxable value of an electric company car is just 2% of its list price, while plug-in hybrids have five bands between 2% and 14% [3]. The resulting Benefit-in-Kind payments are usually much lower than the income tax and NICs on the salary used to fund the monthly rentals, which again helps cut costs compared to leasing privately.

Salary sacrifice schemes provide an attractive perk for employees, including those who wouldn’t normally be eligible for a company car, while supporting safer, more cost-effective, and more environmentally friendly travel.

Since 2017, salary sacrifice schemes have been designed to encourage drivers to opt into low-CO2 vehicles, and employers also benefit. When employees sacrifice salary in return for a benefit, employers don’t pay Class 1 National Insurance contributions on the salary foregone, saving £13.80 per every £100 sacrificed.

Also, it reduces some of the complexities of cash allowances or ‘grey fleet’ – where employees could be driving older or less efficient vehicles. Employers can avoid the administrative burden of ensuring privately owned cars are adequately insured and maintained, while cutting the cost and carbon footprint of business trips.

Salary sacrifice schemes are designed to be simple to operate, but there are some important details to bear in mind when setting them up:

• Who will run the scheme? Having a single point of contact for the leasing company can help ensure the scheme is managed properly and continues to fit the employer’s goals – for example, restricting choice lists to electric vehicles.
• Can employees afford the rentals? Although salary sacrifice can be made available to all employees, the monthly payments can’t take their remaining pre-tax income below the minimum wage threshold. This should be reflected in vehicle choice lists.
• How are you managing risk? Work with your supplier to identify and mitigate financial risks, such as early termination cover for monthly payments in case of long-term sick leave, redundancy, resignation or a reduction in salary.
• How will you integrate it alongside other schemes? Salary sacrifice can complement a traditional company car scheme, and some employees may be eligible for both. We can help develop a driver portal that meets your business needs; either presenting both schemes together for easy comparison, or separating drivers based on their circumstances to avoid confusion.

An experienced supplier is vital. ALD Automotive | LeasePlan’s consultative approach can help businesses to understand how to effectively integrate electric vehicles into their fleet, while reducing costs and improving performance and driver safety.

Buying or leasing a car is a significant life choice. Salary sacrifice schemes are an opportunity for a provider to influence and educate employees who may have never been exposed to company cars (or any other benefits-in-kind) before.

All communications need to be clear, explaining issues that might already be obvious to a veteran company car driver. This will ensure employees are educated, motivated and ready to make an informed decision on whether a salary sacrifice car is right for them.

Some employees will also be unfamiliar with electric and plug-in hybrid vehicles. Providing detailed guides and training can help them choose a car that meets their needs and navigate unfamiliar processes, such as fitting a home chargepoint, with confidence. This can help make electrification seem less daunting and improve uptake too.

If employees resign, the car will be returned to ALD Automotive | LeasePlan and, subject to fair wear and tear guidelines and early termination cover, there will be nothing further to pay.

The company car tax bands used to calculate the vehicle’s taxable value are confirmed until April 2028 [4]. This means incentives for the lowest-CO2 cars will remain in place for the duration of a typical three-year lease.

Cars emitting less than 75g/km CO2, which includes all electric and most plug-in hybrid models, will get a 1% point rise each April from 2025. For battery-electric cars, this will increase from 2% in 2024/25 to 5% in 2027/28, compared to at least 26% for most petrol or diesel models.

[1] BVRLA. (2024). Leasing Outlook Report April 2024. [online] Available at: https://www.bvrla.co.uk/asset/BF62088B%2D0C25%2D4150%2D9F854CFAE4ACA361/ [Accessed 1 Jul. 2024].

[2] HM Revenue & Customs. (2020). Optional remuneration arrangements. [online] Available at: https://www.gov.uk/government/publications/optional-remuneration-arrangements/optional-remuneration-arrangements [Accessed 1 Jul. 2024].

[3] HM Government. (2019). Worldwide Harmonised Light Vehicles Test Procedure (WLTP) - Summary of responses. [online] Available at: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/816532/190617_-WLTP-summary_of_responses_v2.2__1.pdf [Accessed 1 Jul. 2024].

[4] HM Revenue & Customs. (2023). Taxation of company cars: The appropriate percentage for tax years 2025 to 2026, 2026 to 2027 and 2027 to 2028. [online] Available at: https://www.gov.uk/government/publications/income-tax-increasing-the-appropriate-percentage-for-company-cars/taxation-of-company-cars-the-appropriate-percentage-for-tax-years-2025-to-2026-2026-to-2027-and-2027-to-2028 [Accessed 1 Jul. 2024].