SALARY sacrifice. Doesn’t sound good does it? We all like to keep as much money in our pocket or monthly wage packet as possible.
But it can work to your benefit when it comes to cars.
So what is salary sacrifice?
Well, you’ve asked, so I had better get on with explaining.
It’s a formal agreement where an employee agrees to accept a lower salary but in return receives a benefit from their employer.
Once the car has been delivered, the employer will deduct the sacrificed salary from the employee’s gross salary
These arrangements are worthwhile so long as the employee pays a lower rate of income tax on the benefit than they would have paid if they had taken the salary.
So how does salary sacrifice work with cars?
Under a car salary sacrifice scheme an employee foregoes part of their salary (the sacrifice bit), saving their employer the cost of the sacrificed salary and Class 1 National Insurance Contributions. The employer incurs the cost of leasing the car and pays Class 1A NIC on the benefit in kind.
Once the car has been delivered, the employer will deduct the sacrificed salary from the employee’s gross salary.
The deduction should cover the cost of providing the vehicle (including rental, maintenance, administration, insurance and so on). The employee is allowed to sacrifice however much salary they want so long as this does not bring their gross salary below the national minimum wage.
What are the benefits of salary sacrifice?
The employee saves income tax and Class 1 NIC on the sacrificed salary. They have to pay benefit in kind tax but they can keep this low by choosing a low-emission car.
If you want to know more, Colin Tourick has published an invaluable book, which can be ordered or downloaded – click here: Company Car and Van Tax 2015-16
Do you have a car leasing question?