Salary sacrifice for cars in the UK is a benefit scheme offered by some employers that allows employees to exchange a portion of their gross salary for the use of a company car. This scheme can provide employees with access to a vehicle at a reduced cost and offer potential tax savings, although the tax treatment of such schemes has changed in recent years.
Here’s how salary sacrifice for cars typically works:
- Employee Agrees to Sacrifice Salary: An employee agrees to give up a portion of their gross salary before tax and National Insurance contributions (NICs) in exchange for the use of a company car.
- Choice of Vehicle: Employees often have the flexibility to choose a car from a selection provided by the employer, within certain budget or emission limits. Electric and low-emission vehicles are commonly included in these schemes due to their more favourable tax treatment.
- Inclusive Package: The sacrificed salary covers not just the cost of the car but also various associated expenses such as insurance, maintenance, road tax, and sometimes even fuel, depending on the specific scheme. These costs are typically paid from the sacrificed salary.
- Tax Savings: The main advantage of a salary sacrifice car scheme is that the sacrificed salary is not subject to income tax or NICs. This can result in reduced tax liabilities for both the employee and the employer. However, the tax benefits depend on the specific details of the scheme and the chosen car.
- Benefit in Kind (BIK) Tax: Employees who participate in a salary sacrifice car scheme are still subject to Benefit in Kind (BIK) tax, which is based on the list price of the car, its CO2 emissions, and the employee’s personal tax rate. However, electric and low-emission vehicles often have lower BIK tax rates compared to traditional petrol or diesel cars, making them more attractive options.
- Duration of the Agreement: Employees typically enter into a fixed-term agreement, often lasting for two to three years. At the end of the agreement, the car is usually returned to the employer or leasing company.
It’s important to note that the tax treatment of salary sacrifice car schemes has changed in recent years in the UK. As of my last knowledge update in January 2022, the tax benefits for traditional petrol and diesel cars under these schemes were reduced, making them less attractive. However, electric cars and ultra-low emission vehicles (ULEVs) may still offer more favourable tax advantages. Tax laws and regulations are subject to change, so it’s essential to check the latest guidance from HM Revenue and Customs (HMRC) or consult with a tax expert for the most up-to-date information regarding salary sacrifice car schemes in the UK.
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