Nationwide Vehicle Contracts provides an in-depth analysis of the financial aspects associated with leasing an electric car through salary sacrifice.
Salary sacrifice schemes have gained popularity in recent years as an attractive way for employees to access various benefits, including electric car leasing, through their pre-tax income.
Leasing through a salary sacrifice program can offer significant financial benefits, including lower monthly costs and tax savings.
In this guide, we'll delve into the nitty-and-gritty financial aspects of salary sacrifice to provide you with a clear understanding of how it works.
Salary sacrifice is where an employee agrees to 'sacrifice' a portion of their gross monthly salary in exchange for an electric or plug-in hybrid lease vehicle.
With salary sacrifice, the cost of the lease is taken before you pay tax, thus reducing your income tax and National Insurance contributions and effectively reducing the cost of the car.
For car leasing, the rest of the process is normal. You'll pay an initial rental alongside fixed monthly rentals for the duration of your agreement.
In order to secure a car lease through a salary sacrifice programme, the employee must be a permanent employee of the company, have been employed for more than 12 months, and ensure their wage is above the national minimum wage.
Employers who offer a salary sacrifice scheme will have their own criteria, such as job position, years of service, and salary.
The main benefit of leasing a car through salary sacrifice is the reduced income tax. By allowing employees to exchange a portion of their gross (pre-tax) salary for non-cash benefits it reduces their taxable income, which decreases the amount of income tax they owe.
This is how it works:
Suppose you earn an annual salary of £45,000 and decide to participate in your employer's salary sacrifice scheme to lease a £30,000 electric car for three years. Without salary sacrifice, your taxable income would be £45,000. With it, your salary is reduced by £10,000 per year.
Assuming the basic income tax rate of 20%:
Leasing a car through a salary sacrifice scheme can also impact the amount of National Insurance (NI) you pay. As your gross salary is reduced, you'll pay less National Insurance because your annual earnings are lower.
The employee's NI will be reduced as your earnings are lower, and the employer's NI will also decrease.
As well as various financial benefits, leasing a car through a salary sacrifice scheme gives you access to a brand-new car every few years.
You'll no longer have to worry about your motor as it will all be covered through your lease deal, such as fixed monthly payments, maintenance (if included), breakdown cover and road tax.
Check out our guide for a breakdown of the Advantages of Car Leasing.
The most obvious disadvantage of car leasing through a salary sacrifice scheme is that you get less take-home pay. As your salary decreases, your pay check will be lower at the end of each month.
Before taking out your salary sacrifice lease agreement, you must consider this and ensure your reduced budget can deal with other necessary payments such as bills, rent/mortgage, and food.
For more on how to budget, check out our budgeting guide.
A salary sacrifice scheme could have implications for other employee benefits that are calculated based on your salary or require a minimum income level. Such as:
If your financial circumstances change during a salary sacrifice agreement, you must address the situation quickly and effectively.
The first thing you should do is review your budget. Determine whether the change in your situation is a temporary setback or a long-term change, and establish what you should do to try to solve it.
You can also discuss amendments to your agreement with your employer. They may allow you to pause or reduce the amount you sacrifice temporarily.
Ultimately, whether a car leasing salary sacrifice agreement is worth it depends on your situation. If you're earning enough money to sacrifice some, and are looking for reduced tax and National Insurance, then a salary sacrifice scheme would be worth it.
However, if you don't have much money to play with because of other commitments, reducing your take-home pay because of a salary sacrifice agreement might not be the best course of action.
The most important thing is that you comprehensively plan before making a decision. Analyse your new budget and how it will affect your current situation, and consider existing outgoings such as bills, food, and life expenses.
By understanding the financial implications of salary sacrifice, you can make informed decisions that align with your financial goals and priorities.
NOTE: Salary Sacrifice agreements are not available with Nationwide Vehicle Contracts.