Rewarding your people with a company car is a great way to retain talent and attract the right employees to your business.
With salary sacrifice for electric vehicles now in the mix as an employee benefit, you have some excellent options to present to your business.
The schemes can work together, but companies must be mindfulof a few considerations. Here’s our rundown of how each works and how they crossover.
Company Car Allowance
A car allowance is most easily understood as a cash benefit, that’s added to your salary to help cover the cost of using your own car for work.
It’s commonly paid as part of a monthly salary and increases taxable income. Since the car allowance is treated as salary, it's subject to income tax and National Insurance contributions.
Salary Sacrifice for Electric Vehicles
Salary sacrifice for electric vehicles works by deducting an employee’s gross salary in exchange for an electric car.
As the deduction is taken from an employee’s gross salary, it reduces the income tax and national insurance (NI) contributions they pay, and lowers Class NI contributions as the employer. As a result, this minimises the cost of the vehicle to the employee because their gross salary pays for a large portion of the fee.
Because salary is reduced before tax, you may save on income tax and National Insurance. However, some benefits, such ascompany cars, are subject to Benefit-in-Kind (BIK) tax.
Company Car Allowance and Salary Sacrifice for Electric Vehicles: Working Together
Choosing between the two
If you receive a car allowance, you can use it to purchase or lease a car privately. You retain control of the vehicle but pay income tax on the allowance.
If you join a salary sacrifice scheme, you effectively trade part of your pre-tax salary to lease a car through your employer. The BIK tax applies to the car, but it may still be cost-effective compared to using the car allowance.
Combining both
Many companies run Company Car Allowance and Salary Sacrifice for Electric Vehicles schemes in tandem, meaning employees might receive a car allowance and also participate in a salary sacrifice scheme.
For instance, you could use the car allowance to cover the cost of the salary sacrifice reduction. However, remember that the car allowance increases your taxable income while salary sacrifice reduces your pre-tax income.
Tax considerations
The total tax and National Insurance you'll pay depend on the vehicle's emissions, cost, and the applicable BIK rates if you're using salary sacrifice.
You need to consider whether the car allowance or the salary sacrifice arrangement gives you more take-home pay and benefits, for example:
- Cost Comparison: Compare the net cost of each option, including any personal tax implications and the running costs of the vehicle
- Flexibility: A salary sacrifice will likely be a three or four-year commitment, while a car allowance can offer more flexibility
- Mileage Reimbursement: If you use your own car (via car allowance), you may be eligible for mileage reimbursement for work-related travel. Salary sacrifice cars might not qualify for the same rates.
Next steps
Want to understand more about salary sacrifice for electric vehicles and the company car allowance? Gofor is here to help, our friendly team of salary sacrifice experts can provide practical advice.
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