Salary sacrifice vs. company car vs. company car allowance
Car benefit schemes can be complex, and each has advantages and flexibilities for businesses and employees. This guide compares the three most common car benefit schemes employers offer in the UK.
How does car salary sacrifice work?
A car salary sacrifice scheme works similarly to cycle-to-work schemes. In the scheme, employees sacrifice some of their salary for a leased car. The amount comes before Income Tax and National Insurance, so the employee and company save on the contributions paid. The set amount includes payments on car insurance, road tax, breakdown cover, MOT, car maintenance, replacement tyres, and accident assistance.
Advantages of a company salary sacrifice car scheme
Salary sacrifice benefits employees and employers alike. Let’s take a look at some of the primary benefits:
- Savings: Salary sacrifice helps employees save money, which is achieved by saving what would have gone to tax and national insurance contributions. Bundling insurance, servicing, and road tax into the monthly payments also yields extra savings.
- Convenience: Salary sacrifice schemes are incredibly flexible and can adapt to employee needs. Drivers can personalise their mileage and decide how long to keep each car. Services are also built-in if an employee needs extended time off or if they leave.
- Staff satisfaction: Salary sacrifice schemes are a great way to boost employee satisfaction and can even alleviate hierarchical issues by offering car ownership throughout companies.
Disadvantages of salary sacrifice schemes
While leasing a car through salary sacrifice has many benefits, employees must consider potential disadvantages and seek advice before entering schemes. In addition to assessing whether they can afford the lease payments, employees should ensure they choose a car that meets their needs and lifestyle. If you’re unsure about affordability, check the government’s income tax calculator to assess your income for the current tax year.
How does a company car work?
Companies offer employees company cars for personal and business use, often as a perk for those who travel during working hours. Employees typically choose from a range of brands and models, with electric cars growing in popularity. The company handles all documentation and might also pay for fuel expenses. The employer provides the car as a Benefit in Kind (BiK), so the employee must pay a BiK tax for using the vehicle outside of work. This tax will be deducted from the employee’s salary. One of the many questions people ask is, “Do I have to pay company car tax if I don’t use it for personal use?” The good news is there is no company car tax charge when a vehicle is used solely for business. If an employee wishes to avoid the charge, it’s best written in a company policy for transparency.
Advantages of company car schemes
Company car schemes offer many benefits to employees and employers, including:
- No unexpected costs: As employers usually cover insurance, car tax rates, and servicing, employees can rest assured they won’t be out of pocket from the unexpected.
- No financial ties: The employee has no financial ties to the contract because the company leases the car and ensures payments are made on time.
- Low BiK rates: BiK rates are generally a small percentage of the car’s final cost. The tax paid also depends on CO2 emissions, fuel type, and income tax rate. Hybrid and electric car rates are lower than petrol or diesel cars.
- Recruitment incentive: Company car schemes serve as powerful incentives to retain staff and attract new employees. Many businesses advertise the schemes in job adverts.
Disadvantages of company cars
While company cars offer great benefits, employees must also consider factors like the fuel benefit tax, which they must pay if the company car package includes fuel. If the employee uses the car for personal use, they have total liability, which means they might have to pay for repairs if they are involved in an accident.
How does a car allowance work?
Companies pay employees a lump sum with a car allowance to help them buy or lease a car. There are usually no limits on what kind of car or vehicle the employee chooses, but they are responsible for buying or leasing the vehicle. A work car allowance is a taxable benefit, which means it is taxed the same as your salary — you’ll also pay Income Tax and National Insurance on it.
Advantages of a work car allowance
Company car allowances offer a diverse range of benefits, including:
- Potential ownership: If employees buy the car with the allowance, they will own the vehicle and can sell it when they are ready for a new one.
- Cash boost: If the company pays the allowance in cash and the employee already owns a vehicle, they can use it elsewhere.
- Mileage reimbursement: Employees may claim back business mileage at government-approved rates.
- Flexibility: A car allowance lets employees choose the vehicle’s brand and model. Employees can use the car for personal and business reasons.
Disadvantages of car allowances
Before agreeing to a car allowance, employees must consider various costs, including tax, annual running costs, insurance, maintenance, and personal circumstances. If you’re in a poor financial situation, it may be wiser to choose a company car to avoid unexpected expenses.
Choosing the right scheme
If you run a business and are wondering which scheme might work best for your employees, remember that all three schemes have advantages and disadvantages. If you want to know more about salary sacrifice, company cars, or leasing in general, contact a team member.
