Funding a Car through Salary Sacrifice

We look at the different salary sacrifice models and the benefits introducing this scheme could have for your business

Funding a Car through Salary Sacrifice

Funding a new car under a salary sacrifice scheme has many benefits to the employee and can be achieved with minimal cost and disruption to an employer.

In brief terms, it is an arrangement put in place by an employer as an employee benefit whereby the employee agrees to give up part of their pre-tax salary – or ‘sacrifice’ it – in exchange for leasing a non-cash benefit such as a car. It is not intended as a replacement for a traditional company car scheme.

While benefit-in-kind tax is payable by the employee on the car based on its list price and carbon dioxide emissions, this is often substantially lower than the income tax the employee would have paid on the salary sacrificed.

And unlike a personally funded new car, a car provided under salary sacrifice includes all the traditional benefits of a company car, such as full maintenance, insurance and road tax, offering a tax-efficient and hassle-free option.

Which models suit salary sacrifice best?

Salary sacrifice can thus be well-suited to smaller models with lower CO2 emissions than the average car as these are commonly chosen by non company car-driving employees, and are also popular with those seeking to acquire a second car under a salary sacrifice arrangement.

The SEAT model range is thus highly appropriate to a salary sacrifice scheme; the Ecomotive models for example, available across the SEAT range, offer CO2 emissions from as low as 92g/km and combined fuel consumption of up to 80.7mpg (Ibiza 1.2 TDI CR Ecomotive).

Employer benefits

  • Enhanced employee benefits package. A salary sacrifice scheme tends to come at little or no cost to an employer, and provides employees with a tax-effective extra benefit.
  • Lower NIC contributions. Employers can save on National Insurance Contributions as, although NICs are still payable on the provision of the car, contributions are generally less than those owed on the salary being sacrificed.
  • Health and safety benefits. A car provided under salary sacrifice will be properly maintained and insured for business use under the contract – one of the perennial concerns of a so-called ‘grey fleet’.
  • Environmental benefit. As cars supplied under salary sacrifice will be new models provided by a leasing company, their ‘green’ credentials are likely to be stronger, offering a responsibly implemented benefit.

Employee benefits

  • Reduced tax liability. A salary sacrifice scheme takes payments from pre-tax (gross) salary, subject to the salary not being ‘sacrificed’ to a level below the national minimum wage. The employee’s income tax liability and National Insurance Contributions are therefore likely to be reduced.
  • Hassle-free car ‘ownership’. A car provided under a salary sacrifice scheme offers many of the benefits of a company car, as it is supplied fully maintained, taxed and insured, and generally with no lump sum up-front payment required.
  • Cost-effective procurement. Cars are supplied through corporate agreements with a leasing provider, meaning that the employer’s procurement savings in terms of fleet discounts and bonuses can be passed on and preferential corporate finance rates applied.
  • Easy budgeting. A single monthly payment covers all acquisition and operating costs for convenient and predictable budgeting.
  • Easy disposal. At the end of the lease the car is returned with no additional charge, subject to it meeting the required return standards and having covered no more than the agreed contracted mileage.

How does it work?

Implementation and acceptance of a salary sacrifice car scheme is made between the employer and the employee, who usually needs to be in permanent employment to be eligible. The supply agreement and vehicle leasing contract is made between the employer and the leasing company.

Many providers handle their salary sacrifice schemes online, with a dedicated website that enables employees to obtain quotes, choose vehicles and see for themselves the tax and National Insurance savings available before they commit.

Under a salary sacrifice arrangement, the employee’s gross salary is reduced and so the amount of their pension contributions also reduces. Although some pension schemes allow the pension to be calculated by ‘reference’ or ‘notional’ salary – the pre-sacrificed salary – this very much depends on the pension scheme chosen.

HMRC’s view

Her Majesty’s Revenue and Customs regard salary sacrifice arrangements as an employment, rather than a taxation, matter, as individuals are free to agree changes in remuneration with their employer.

Entering into a salary sacrifice arrangement is, in essence, the same as agreeing to a salary reduction.

To fall within the tax break, however, HMRC will want to establish that a change in salary is permanent, meaning that any change must be for a minimum 12-month period, and the agreement to sacrifice salary must be in place before the car is delivered.


A salary sacrifice scheme offers significant benefits to both employer and employee. For the employer, the key advantage is that as most schemes are outsourced to a leasing specialist all administration and implementation is handled by a third party once the initial supplier selection procedure is completed.

For the employee, there is the promise of highly tax-efficient hassle-free motoring in a car that suits their budget and earnings.

As always, implementation involves careful and effective communication and integration of such a scheme into the employer’s staff benefit package.

Note: the information given with regard to the tax liability of employees is for guidance only. The tax position for different drivers will vary according to their personal circumstances and drivers should consult a tax accountant for specialist advice. All tax figures are based on the latest production models. Please check with your supplying dealer the official carbon dioxide emissions of the model in which you are interested.

This article is in association with SEAT Fleet

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