The Pros and Cons of Car Salary Sacrifice

If you're thinking about taking advantage of a car salary sacrifice scheme through your employer, you could be on the path to getting a brand new car at a significantly reduced price.

By sacrificing a portion of your pre-tax salary, you'll be paying for the car out of your gross income, resulting in substantial tax savings.

You are essentially paying for the car with your pre-tax earnings.

However, it's important to be aware of the potential pitfalls that come with salary sacrifice and how to avoid them.

As long as you understand how it works, it can be great. But make sure you understand it before you race into it.

Here are the pros and cons we think you should know.

The Pros:

Tax Savings

The primary advantage of a salary sacrifice scheme is the tax savings you'll enjoy. By paying for the vehicle out of your pre-tax income, you'll avoid paying income tax and National Insurance contributions on the sacrificed amount, effectively reducing the overall cost of the vehicle.

All-Inclusive Package

Most schemes bundle various costs into a single monthly payment, including the vehicle itself, insurance, maintenance, and even roadside assistance. This simplifies your life by eliminating the need to manage multiple bills and payments.

Access to New Vehicles

Salary sacrifice schemes often provide access to brand-new vehicles, which may not be financially viable for you under traditional purchasing or leasing arrangements.

Potential for Lower Emissions

Many employers encourage the selection of electric or hybrid vehicles through their salary sacrifice schemes, promoting environmentally-friendly transportation options.

The Cons:

Early Termination Fees

This is probably the most important thing you need to know about. If you decide to leave your job or terminate the agreement early, there may be significant early termination fees.

To avoid this, ensure that the salary sacrifice provider offers comprehensive early termination protection.

Make sure you understand this part in detail particularly the scenarios it covers (e.g., resignation, dismissal, redundancy).

Bear in mind this can quite different with different salary sacrifice providers.

Impact on Pension Contributions

If your employer calculates your pension contributions based on a percentage of your salary, the sacrificed income could potentially reduce your contributions.

Ask your employer how they handle pension contributions for salary sacrifice schemes.

Many employers calculate pension contributions before the salary sacrifice deduction to avoid any negative impact.

Ideally you don't want your pension to be affected so make sure you understand this before you go ahead.

Electric cars only on most schemes

Most salary sacrifice providers only give you access to full electric cars.

Others let you access plug in hybrid cars as well as full electrics.

If you're not quite ready to go full electric, but would consider a plug in hybrid, ask your provider provider what type of cars are available.

Cars are too expensive

To get the best prices, you want a salary sacrifice provider with access to multiple finance companies.

Each one offers their own deals, so the more finance companies, the more deals and the better prices you will get.

If your salary sacrifice scheme has only 1 finance provider, the prices are probably going to be much higher because they don't have as many deals.

If you already have a salary sacrifice scheme set up and the prices are sky high, ask your boss if they would consider having another salary sacrifice provider available to get better prices.

Potential for Excess Mileage Fees

If you exceed the agreed-upon mileage limit for the vehicle, you may face excess mileage fees at the end of the contract.

Ask the provider how they monitor and adjust mileage limits during the contract period.

Ideally what you want from your salary sacrifice provider, is for them to regularly review your mileage and make adjustments to your contract so you can pay monthly for the mileage you are actually driving.

This way you are much less likely to get a big excess charge at the end of your contract.

Not all salary sacrifice providers allow you to adjust your contract mid contract.

If that is the case and you drive over your allotted mileage, you'll get a big lump sum bill at the end of your contract, which nobody wants.

Ask your salary sacrifice provider if you are able to adjust your contract mileage mid contract if you need to.

Accelerated payments

This can turn into a nightmare. Some salary sacrifice schemes (including one of the big ones) front load your monthly payments, so they start of very high and get lower over time.

Ideally you want to have your payments the same every month because it's easier to keep track of and you wont get walloped with a massive payment in your first few months of your contract.

Providers with Accelerated Payments advertise the average cost, but this isn't what you actually pay.

A lot of people will be expecting the average payment, and when that first payment comes out and it's huge, they will not be happy.

Ask your provider if the payments are the same each month or if they do "accelerated payments".

We would strongly recommend going for a provider with consistent payments every month.

Avoid accelerated payments.

Getting salary sacrifice for your business

It's important that you understand all these pros and cons before you get a car through salary sacrifice.

If you know what to expect, you can save a lot of money and avoid any unexpected lump sum bills at the end of your contract.

Want to get salary sacrifice for your business?

Book a call and we'll talk you through it ??

https://calendly.com/d/49y-nxd-q56

Cheers.

Vehicle Consulting