Why salary sacrifice delivers more than just tax and NIC savings
Introduction
Salary sacrifice is not a new phenomenon; it has been around for years, and we all know the basics – in return for a reduction of your gross salary, you get a brand-new car at a much better price.
Principally salary sacrifice savings are generated because employees pay less income tax and National Insurance Contributions (NIC) once they’ve joined a salary sacrifice scheme. But it’s easy to overlook the secondary savings, which whilst not available to everyone, are available to a large proportion of employees taking a salary sacrifice car.
Additional savings regardless of income
VAT
VAT is a key additional savings opportunity available to many employees; most employers can recover VAT on the lease of a company car, which they can subsequently pass onto their employees under salary sacrifice. Despite there being a partial VAT block on the finance rental for the car, considerable savings can still be made by all employees from their employer’s ability to recover VAT, regardless of the employee’s tax bracket.
The only consideration is that the amount available to recover will depend on the VAT exemption status of the employer; for example, a company which only sells insurance, which is exempt from VAT, won’t be able to benefit from any VAT recovery so the VAT savings won’t be available to its employees – but with income tax and NIC savings available as standard, and a range of additional savings available too, salary sacrifice should still be an attractive option even if the VAT cannot be recovered.
Student loans
There are four student loan repayment plans in the UK, although most former students will only make repayments under one of these, plan 2 for undergraduate degrees, which currently sets repayments at 9% on earnings above £28,470; the repayment plan and threshold differ slightly depending on graduation year.
For those students who have carried on to study for a Master’s degree, they will be required to repay an additional 6% above £21,000.
The good news for employees repaying under one, or both, of these plans, is that the repayments are based on the post-sacrifice salary, meaning there could be an additional 15% savings available on the cost of a salary sacrifice car, which is certainly not to be sniffed at!
For example, the Cupra below would see the net sacrifice drop by an extra £131 per month should the driver be repaying both an undergraduate and Master’s degree.
Cupra Born - Salary Sacrifice example provided within our Gensen Salary Sacrifice software.
And, as student loan repayments made by employees are collected via PAYE, the employee wouldn’t need to do anything extra when taking a salary sacrifice car; they would simply receive the student loan relief automatically via payroll.
Employees earning more than £60,000 per year
Those who earn more than £60,000 per year and claim child benefits will have to begin to incrementally pay back their benefits as their earnings rise until everything claimed has been paid back, which occurs when annual earnings reach £80,000.
The High-Income Child Benefit Charge (HICBC) was introduced in 2013 and affects an estimated half a million households across Britain. Whilst regressive for all those earning over the £60,000 threshold, employees with access to salary sacrifice could mitigate the impact of the HICBC and thereby benefit from even more savings by taking a salary sacrifice car as the reduction of their earnings would lead to lower HICBC repayments, boosting the financial savings available on their salary sacrifice car.
Employees earning more than £100,000 per year
They have several options available to them, such as additional payments into their pension, or donating to charity, but they could also take a salary sacrifice car and access the highest level of tax savings available via salary sacrifice.
For example, on this BMW i5 M Sport with a monthly gross salary sacrifice of £1,132, the employee saves income tax of £679 per month simply by reducing the income taxed at the effective 60% rate, better than half price; anyone living north of the border would save even more as the effective rate is 67.5% in Scotland.
BMW i5 M Sport - Salary Sacrifice example provided within our Gensen Salary Sacrifice software.
But saving at these exceptionally high effective tax rates is not the only benefit available to those who earn more than £100,000 per annum because there are additional costs applied to those who earn at this level, and it’s feasible for someone to be better off earning £99,999 rather than £149,000.
For example, once someone earns more than £100k they lose their entitlement to the free childcare offered to parents with children under two; the entitlement is rising to 30 hours per week from September 2025 and its loss would prove costly given the cost of childcare.
Moreover, those earning £100,000 also lose their entitlement to the tax relief available under the childcare account under which parents can benefit from a government subsidy of £2 for every £8 they pay, up to a maximum of £2,000 a year for children under 12.
Unfortunately, earning just £1 over the threshold means entitlement to both benefits is lost completely, highlighting the potentially huge secondary incentives, over and above the standard tax and NIC savings, available to those opting to take a salary sacrifice car rather than allow their earnings to creep over this arbitrary, but tax costly, threshold.
The benefits of salary sacrifice savings
Salary sacrifice for cars is undoubtedly a great option for many employees across Britain; access to a brand-new zero-emission car for a substantial discount should never be taken for granted.
However, there is an array of secondary savings available, with some employees being entitled to unpredicted savings, depending upon their individual situation, that significantly increases the value of joining a salary sacrifice scheme, and potentially selecting more than one car.
This article was written by Rhys Whitcombe, for BROKER NEWS. You can read the original article here.
