Could you do 'Salary Sacrifice' in this Christmas's What am I?

In my day job I get asked a lot about the best way to finance the ownership or use of a vehicle ( Company car / van truck etc ). In the UK there are currently 2 really big buzz words you hear around this - Salary Sacrifice and Total Cost of Ownership.

Salary Sacrifice is a really efficient way for any ( especially higher rate ) tax payers to pay for their car. Salary Sacrifice is growing in popularity, especially to use the potential tax savings to offset part or all of the premium you would otherwise have to pay for moving to a generally more expensive Electric vehicle ( compared to comparable Petrol or Diesel vehicles ).

Total Cost of Ownership ( TCO ) is a popular measure that employers can use to show employees the whole cost of providing a company vehicle.

More formal definitions would be;

Salary sacrifice is a financial arrangement in which an employee agrees to give up part of their salary in exchange for certain non-cash benefits ( eg. a car )

The Total Cost of Ownership is a comprehensive measure that includes all the direct and indirect costs associated with owning and operating a vehicle over the lifecycle of the financing or use.

Employers can use TCO to provide an easy to understand measure of the true benefit they are providing. It also provides both employer and employee a way to easily compare the true cost of a vehicle from a selection available to them.

Employees can use Salary Sacrifice to access tax savings to offset the cost of acquiring their vehicle.

How Salary Sacrifice Works for Vehicle Acquisition:

1. Employee Agreement: An employee agrees to sacrifice a portion of their pre-tax salary to fund the acquisition and running costs of a vehicle. The sacrificed amount is deducted from the employee's gross salary before income tax and National Insurance contributions (NICs) are calculated.
2. Employer Arrangement: The employer facilitates the salary sacrifice scheme, making arrangements for the vehicle acquisition, maintenance, and other associated costs. The employer typically leases the vehicle and assumes responsibility for insurance, maintenance, and other running costs.
3. Tax Implications: Employees benefit from reducing their taxable income, even potentially moving into a lower tax bracket. Lower taxable income leads to reduced income tax and NICs.

Whats included in Total Cost of Ownership (TCO):

1. Vehicle Costs: Purchase price, financing costs or lease payments & depreciation over time of financing.
2. Running Costs: Fuel or charging costs, Insurance premiums & maintenance and repairs.
3. Tax Considerations: Tax relief on business-related expenses.

Employee potential savings example

(based on UK 2023/24 rates) :

Let's consider an employee in the UK earning £40,000 per year. They decide to sacrifice £5,000 of their annual salary for a Salary Sacrifice vehicle.

Without Salary Sacrifice:

• Income Tax : £5,486
• Employee NICs : £3,291.60
• Take-home pay: £40,000 - £5,486 - £3,291.60 = £31,222.40

With Salary Sacrifice:

• Adjusted Gross Salary: £40,000 - £5,000 = £35,000
• Income Tax : £4,486
• Employee NICs : £2,691.60
• Take-home pay: £35,000 - £4,486 - £2,691.60 = £27,822.40

In this example, the employee saves £1,600 in tax and NIC. (exact savings will depend on individual circumstances and the specific terms of the salary sacrifice scheme). Therefore, in sacrificing £5,000 the employees take home pay only actually reduces by £3,400.

However, be aware making Salary sacrifice payments and reducing your take home pay could effect your borrowing ability and possibly impact other employee benefits such as pension or life insurance benefits!!

It's crucial to note here that additional tax other than shown in the example above may be payable depending on acquisition method and that tax laws and rates may change. Individuals should seek advice from financial and tax professionals before entering into such arrangements to ensure compliance with the latest regulations.