Salary sacrifice car scheme explained
If you’re looking for a low-cost way to run a new car, a salary sacrifice scheme could be the easy lease alternative to a company car
Many employees enjoy a company car as part of their work, while others choose a PCP (personal contract purchase) or PCH (personal contract hire) lease deal. There is another way and it’s called the salary sacrifice car scheme, sometimes referred to as ‘salsac’ for short.
Salary sacrifice car schemes are offered by many companies as a way to attract and retain staff, and this type of lease deal can be very cost-effective, especially if you choose an electric car or plug-in hybrid model.
A salsac works by taking an agreed amount from your pre-tax income to cover the monthly lease cost, which is similar to how the Cycle to Work scheme operates.
What is a salary sacrifice car scheme?
A salary sacrifice car scheme is a lease deal offered by companies to its employees in place of a company car, or a PCP or PCH. It is paid for out of your gross salary rather than from your take-home pay where taxes have been deducted.
By paying the monthly charge for the car out of pre-tax earnings, it reduces the amount of income tax and National Insurance paid by the employee and reduces an employer’s National Insurance Contributions.
Not all companies choose to offer a salsac, but it is a popular way to offer staff a new car at a keen price.
How does the salary sacrifice car scheme work?
You agree on an amount of money with your employer to be used to pay for a car. This sum is then deducted from your pre-tax salary to cover the monthly payment on the car you have chosen.
The employer leases a car from a third-party provider and then leases the car to you. These deals tend to run for between two and four years, and the employee can drive the car for business and private use.
The advantage of this is you don’t pay National Insurance or income tax on the salary sacrifice payment amount. This is unlike a normal lease deal where you would pay out of your take-home salary, so a salsac means you have more in your pay packet after you have paid tax and the car payment.
What are the good points of a salary sacrifice car scheme?
There is no deposit or initial up-front payment with a salary sacrifice car scheme. This makes it much more accessible to employees on lower incomes who might not otherwise be able to afford a new car lease deal.
When you have agreed on the salsac amount to come out of your pre-tax salary with your employer, you can choose a car and begin the lease deal. Most salsac deals come with a lower monthly rate than a PCP or PCH, so you can choose a higher spec car or choose the one you want for a lower payment.
A salary sacrifice car scheme usually includes all running costs except fuel or charging. As with a company car, the scheme will include road tax, insurance, servicing, maintenance and breakdown cover.
Companies are keen on salary sacrifice car schemes because it reduces their National Insurance Contribution and moves all of the cost of the lease deal on to the employee. It also lets employees choose the car they want rather than being allocated a car without any choice in the decision.
What are the drawbacks of a salary sacrifice car scheme?
Not all cars will be available on a company’s salary sacrifice car scheme – it depends on what is offered by the third-party provider the company partners with.
Although a salsac can mean more disposable income for the employee thanks to the lower cost to them of the scheme, it can result in smaller take-home pay on paper. This lower pay after income tax and National Insurance are deducted could affect how much you can borrow for a mortgage or loan.
A smaller salary after tax can also reduce how much life insurance you can have as this is usually calculated on post-tax salary. You could also miss out on pension contribution refunds if you leave a job within the first two years of employment because a salary sacrifice car scheme is classed as employer contributions.
You will have to pay Benefit in Kind (BIK) tax on a car provided through a salsac as it’s defined as a perk. How much BIK you pay will be worked out from the car’s taxation class. This makes EVs and plug-in hybrids popular with salsac users because of their low BIK rates compared to petrol and diesel cars. From 1 April 2025, EVs pay BIK at 3%, rising by 1% per year in 2026 and 2027.
Anyone earning the National Minimum Wage will not be able to access a salary sacrifice car scheme. The rules forbid anyone’s salary to drop below the legal minimum threshold after deductions. You could also miss out on benefits such as Statutory Maternity Pay if your salary dips below the required threshold.
Why does a salary sacrifice car scheme favour EVs and low emissions cars?
With the government keen to encourage drivers into cleaner, low emissions cars, the Benefit in Kind (BIK) rate for electric cars is much lower than for petrol or diesel vehicles.
Anyone using a salary sacrifice car scheme will have to pay BIK, which is calculated at 3% from 1 April 2025 for EVs, and it rises by 1% per year in 2026 and 2027. The same rate applies to plug-in hybrids with emissions of 50g/km or less and an EV driving range of at least 130 miles.
The BIK rates quickly increase as a car’s carbon dioxide emissions rise, which means you pay more in tax.
Can anyone use a salary sacrifice car scheme?
If your company offers a salary sacrifice car scheme, most employees can access it. You don’t need to use the car for business purposes – you can use a car through a salsac for private journeys as well.
Staff who earn the Minimum Wage will not be able to have a car using salsac because the scheme does not permit anyone’s take-home salary to drop below the minimum threshold after deductions.
If your salary drops to the National Minimum Wage after the deduction for a salary sacrifice car scheme, this is allowed. But it’s usually deemed inadvisable for employees to put themselves in this position as a way to fund a car.
Can I take the car with me to a new job?
No. A car provided through the salary sacrifice car scheme is leased by an agreement between the company and a third-party provider. This means the company is responsible for the car.
If an employee leaves part-way through a salsac, the company may be liable for an early termination fee – usually half of the remaining term. However, most salsac deals include early termination insurance to cover this potential cost. This is included in the monthly salsac payment, so the employee is paying for it rather than the company. Some employers retain the National Insurance contribution savings they get to pay for this problem if it arises.
Do I own the car at the end of the salary sacrifice car scheme period?
No, but you can ask to buy the car outright based on its market value. If you think you’d like to own the car, speak to your employer well in advance of the salsac deal coming to an end.
Some lease providers will be happy to discuss this, while others will insist the car is handed back at the end of the lease period.
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