Pros and Cons of Salary Sacrifice

The very term implies you’re giving something up, but you’re not, really. Some recognise salary sacrifice as the perfect way to get into a new car, but others treat it as a complex arrangement with hidden costs and risks. We’re here to explore what the pros and cons of salary sacrifice are? We’ll try to take an impartial view in this article.

Salary sacrifice is a well-established way of allowing your employees to pay for certain everyday expenses from their salary. Well, it’s more like the employer pays for these items, then deducts the cost from their employees’ pre-tax salary. The benefits are largely obvious, with tax and national insurance savings. On top of that, you can get some additional, less-obvious savings. However, there can be a sort of tax on the benefit, which offsets these savings.

Pros and Cons from the Employee’s POV

Salary sacrificing for a car saves the employee tax and NI. It also gives them access to corporate discounts and normally some VAT savings too. It does not involve a big upfront deposit nor a personal credit check. One payment usually includes everything except fuel and fines.

There are some negatives that you need to be aware of. This is a taxable benefit for the employee and defined by HMRC as not flexible. If an employee “changes their mind” about the car, they cannot hand the car back early. The tax on the benefit rises as the CO2 rises. This is great news for electric cars, bad news if you want a diesel.

Employees have no right to purchase the car either., they will never own it. Although, in some cases, they can purchase it for the market value at end of the term. This value cannot be disclosed until the final month as it isn’t known before this point.

Pros and Cons from the Employer’s POV

For the employer, costs are deducted from the employee and an employer’s NI saving can also be made. It also differentiates an employer as caring for both their team and the environment.

The negatives depend on the scheme you choose. You may be exposed to leaver risk, though many schemes have protection should a colleague leave. However, this sometimes doesn’t kick in until after a qualifying period, leaving the employer to fit the bill.

The same applies should the employee fall below the living wage, which is typically due to maternity or long-term sickness. If you can’t deduct the employee’s salary, you still have to pay for the car.

Some schemes can also bury you in admin with contract variations, passing on recharges and tax declarations. A lot of suppliers treat salary sacrifice cars like traditional company cars; they assume you have a fleet team to manage the admin, rather than taking care of this for you.