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A salary sacrifice lease car is a scheme allowing staff members to drive a brand-new car for a portion of their salary. Because the non-cash benefit is taxed at a lower rate than earnings, it’s seen as a cost-neutral option for both parties.

Unlike a company or benefit car, a salary sacrifice car comes with less restrictions on how it can be used. Also, it offers more flexibility for the employer that’s named on the finance agreement.

Want to find out more about how a salary sacrifice scheme works when leasing, plus its benefits? Read on to discover if it’s the right option for your business.

How does salary sacrifice work for a car lease?

Salary sacrifice car leasing works differently to other company benefit schemes. In most cases, the benefit (i.e. the car in this case) is paid for using the pre-tax income of the employee. This means that an employee doesn’t have to pay income tax or National Insurance (NI) on it, while employers won’t have to pay NI contributions on it either.

Unfortunately, certain laws were put in place to prevent tax and NI avoidance. In April 2017 the government introduced legislation known as Optional Remuneration Arrangements (OpRA) that changed the way companies were taxed.

Electric cars and Ultra Low Emission Vehicles (ULEVs) producing CO2 emissions of 75g/km or less aren’t impacted. However, companies choosing a car which emits more than 75g/km of CO2 emissions will need to pay either:

  1. The BIK (Benefit In Kind) tax on the car, which is determined by the CO2 emissions of a vehicle, its P11D value (including list price, VAT and delivery charges) and your tax bracket.
  2. The income tax on the amount of salary being sacrificed.

Employees will pay whichever of these two values is higher, in exchange for having the car for around 2-3 years. As part of the agreement, an annual mileage cap must be specified that ranges from 8,000-30,000 miles per year. Although no-deposit options are available, companies may want to consider paying some cash upfront to go against the total lease cost and reduce the monthly lease payments.

At the end of the agreement the car is handed back to the leasing company and the company decides whether to walk away with nothing more to pay, or take out another agreement on a newer model.

Benefits of salary sacrificing a lease car

Employer benefits

  • No financial risk – a salary sacrifice lease car is funded by your employee’s income, so if they resign the company doesn’t have to keep the car.
  • No vehicle risk – lease cars are brand-new models and come with the manufacturer’s warranty/road tax included for the duration of the agreement, meaning you won’t have to worry about paying for any unexpected repairs. Often the lease payments include insurance and repair costs too, which can be an added peace of mind if there are multiple drivers working for the business.
  • Improve company image – a company that’s seen as offering benefits such as a new car will undoubtedly be able to keep staff and attract new talent to the business.
  • Reduce carbon footprint – smaller, more fuel-efficient engines in modern cars and the availability of electric/hybrid models on salary sacrifice agreements can help your company make a positive environmental impact.

Employee benefits

  • Easy access to a new car – the employer will be responsible for arranging the finance for the agreement; all you have to do is pay the fixed monthly lease payment.
  • Lower monthly payments – salary sacrifice car schemes are paid for using your gross salary, which is cheaper than having to fund a car through using cash or a loan that comes with high interest rates.
  • Flexible motoring – employers using a salary sacrifice scheme are often able to negotiate all-inclusive agreements that come with car maintenance, insurance and breakdown cover for one monthly payment.
  • A cheaper way to access electric cars – all EVs on salary sacrifice schemes are paid using your pre-tax income, plus the BIK tax rate of the vehicle. Because the BIK tax rate for battery-powered cars is currently 0%, rising to just 1% and then 2% in the next two years, you’re guaranteed to make a significant saving by switching to an EV through this scheme.

Is a salary sacrifice lease car right for me?

Not every company will be suited to a salary sacrifice car scheme, so it’s important to consider the reasons for wanting to use this method of financing cars for employees. Here are a few examples of when a company may want to choose a salary sacrifice car lease.

4 reasons why businesses choose a salary sacrifice car lease

  1. To cut CO2 emissions – if you have a lot of grey/company fleet drivers that use older, more polluting cars for example, this scheme offers affordable access to EVs and ULEVs.
  2. Improve employee offering – a salary sacrifice car is still considered a benefit to a company’s employees because it grants them access to a new vehicle which they can then use for personal and business journeys.
  3. Saving money – despite the government’s OpRA legislation to try and prevent NI and tax avoidance, companies can still be exempt from this if they decide to go electric or at the very least choose an ULEV.
  4. A more efficient fleet – if a company’s drivers are using new, reliable models while on the job, it’s significantly less likely that down time (i.e. the amount of time a worker is off the road) will negatively affect production.

On the other hand, in some circumstances a company might not want to choose a salary sacrifice scheme.

3 reasons why businesses might avoid a salary sacrifice car lease

  1. If cutting an employee’s salary will mean that they’re earning less than the national minimum wage – for obvious reasons, this isn’t legal and a renegotiation of salary may be needed in order to allow for a sacrifice in pay to be made.
  2. When a company has high turnover of staff – the very nature of a salary sacrifice car scheme is to encourage employee retention, therefore it won’t be logistically or financially appropriate to suggest committing to a finance agreement if it’s unlikely that employees can see it through to the end.
  3. If the cars available aren’t fit for purpose – every company has its own idea of what vehicles should be used for, so it’s important to find a model(s) that gets the job done. Because not all fleet providers offer salary sacrifice car lease schemes, it may be that limited availability makes more traditional company car schemes more appropriate.

Want the best deal on your new car? Moneyshake saves you time and money, simplifying your search for a brand-new vehicle.

Compare the best business lease deals