Salary Sacrifice

Salary Sacrifice

Overview Features 2017 Budget

Salary Sacrifice schemes are designed to provide a traditional Company Car to employees who are not otherwise entitled to one.

In the last ten years Salary Sacrifice has grown in popularity and they work especially well with zero or low emission cars.


If you are looking for a Salary Sacrifice product for you or your business chech out our dedicated Page



Questions you may ask?

  • How has the budget announcement impacted salary sacrifce schemes?                                   
  • What are the advantages of these schemes?        
  • Should I choose salary sacrifice?                        
  • So what is salary sacrifice ? 

 How does it work?

You may provide a Company Car to an employee and in return the employee will sacrifice a sum of their gross salary. Normally these schemes are designed so that the sum sacrificed by the employee meets all of the costs to your business of providing the car, including items such as insurance, early termination cover, service rebills and damage charges.

Having sacrificed salary the employee saves paying income tax and National Insurance on that Salary instead paying tax on the Company Car Benefit. No employee NICs are payable on the car benefit. Salary Sacrifice schemes are particularly attractive where CO2 emissions are low and the resulting Company Car tax is substantially less than the tax and NI that would have been paid on the sacrificed Salary. As the cars provided to employees are Company Cars they can also be used for business travel. This reduces the requirement for the use of pool cars/hire cars by these employees or reduces the level of business mileage reimbursements.

The greater breadth of company cars would provide for additional flexibility, especially in the case of employees that leave. Cars can easily be redeployed with a different driver under Salary Sacrifice arrangements (car policies need to be structured carefully so that any cars requiring reployment are attractive and appropriate for other employees), or can be utilised for essential car users. Salary Sacrifice promotes the take up of environmentally friendly cars, aiding 'green agenda'. There is a potential early termination exposure where staff attrition rates are high and vehicles can not be easily redeployed.

NEW RULES IMPACTING SALARY SACRIFICE ARRANGEMENTS - Any salary sacrifice agreements entered into on or after 6th April 2017 will be subject to new governing measures. Employer national insurance contributions will be based on the higher of the gross amount of salary being sacrificed or the value of the BIK provided. These new rules do not affect cars with CO2 emissions of 75 g/km and below. Where employees enter into new arrangements on or after 6 April 2017, then their company car benefit will equal the greater of (i) the amount as calculated via traditional company car BIK methodology, and (ii) the gross salary sacrifice foregone. 


IFRS 16 Update : For Publicly quoted firms that report to the International Financial Reporting Standards and the public sector


New lease accounting rules effective from 1 January 2019.


The International Accounting Standards Board (IASB) has now published a new International Financial Reporting Standard (IFRS) 16, which requires lessees (customers leasing an asset) to recognise assets and liabilities for most leases on the balance sheet. IFRS 16 will supersede the current lease standard International Accounting Standard (IAS) 17.


Previously, a lessee would have to determine whether the lease is a finance lease or an operating lease. This is effectively done by assessing the risks and rewards inherent in the lease. Contract hire arrangements are usually operating leases.


Publicly listed companies already have to make a note to the annual report, which reflects any operating lease rentals payable. Businesses will need to ensure they report on their liabilities (rental payment arising under the lease) and their asset (the right to use the leased asset).



Cashflow is essentially neutral as the employee pays their employer through the salary sacrificed, who in turn pays for the vehicle from the leasing company.

Cost Of Finance

Leasing vehicles through a corporate sponsored programme you would expect finance to be cheaper than individuals accessing finance through conventional retail sources.


In line with cash outflows these will be neutral but dependent on the structure of the specific scheme there may be issues in the event of vehicles early terminating at rate higher rate than planned or where other non fixed costs are higher than budgeted for. i.e. insurance, accidents. 


Distance durations can be amended but the salary sacrifice will be impacted and this needs to be carefully planned.

VAT Recovery

Up to 50% of the input VAT on the finance charge and 100% of the input VAT on any associated services or maintenance costs can be recovered. For vehicles that are used solely for business purposes with no private use whatsoever then up to 100% of the input VAT on the finance charge is recoverable. For vans 100% of the input VAT can be recovered on both the finance charge and services / maintenance charges and this will not vary by financing method. The actual VAT recovery position will also be dependant on the VAT status of your organisation.

Leasing cars can offer a method of car provision that is more cost effective than direct purchase arrangements. No input VAT is recoverable on cars purchased outright or via a form of purchase lease/ hire arrangement where the organisation takes ownership or has an option to take ownership of the car.

Residual Value Risk

Residual Value Risk - Risk and reward associated with the value of the vehicle at the end of the contract is retained by the lessor not the employer, protecting the employer from any adverse movements in the used vehicle market.

Tax Deductible Expense

If your organisations is in a tax paying position you are allowed to deduct finance rentals against profits in order to gain corporation tax relief.Under the corporation tax rules introduced in April 2013, you can deduct the full cost of finance rentals from taxable profits if the car emits 130g/km of CO2 or less; or 85% of the finance rental on vehicles with higher CO2 emissions. For all vehicle acquisition methods vehicle ancillary services and maintenance expenditures are fully allowable for corporation tax relief.

Vehicle Management and Administration

Vehicle Management and Administration - it is typical that the management and administration ( in full or part) associated with this acquisition method is provided by a specialist Fleet management company / finance company, allowing you to free up your internal resources to focus on core business activities. 

Early Termination Costs

Early Termination Costs - there are varying formats for calculating charges in the event that a vehicle is returned prior to the agreed contract end date. In a simple form early termination charges may be expressed as a percentage of outstanding rentals (Typically 40 or 50%). In some circumstances these costs may reflect the actual market adjustment required to cover costs associated with the early return of the vehicle and may include additional costs levied by the lessor to recover their fixed administration costs.

Excess Mileage and Damage Charges

Excess Mileage and Damage charges - when a fixed monthly rental is calculated upfront the services charged for and depreciation recovered in the finance rental is based on the contracted mileage and assumed return condition at the end of the contract. If your return mileage is greater than the contracted mileage or the return condition is below the industry standard for a vehicle of similar age and mileage than additional charges will be levied to compensate the financing company. (these charges should reflect market conditions and therefore would be in line with other acquisition methods, however depending on the finance company these charges may include some form of incremental administrational charge or penalty).

Option To Own The Vehicle

Contract Hire is a form of operating lease and as such has no provision to allow the employer (lessee) to purchase the vehicle at the end of the contract.

Product Features

Off Customer Balance Sheet*

Transfers Risk and Reward to Lessor

Utilises 3rd Party Funding

VAT Recovery on Capital - Car 50% (unless exclusive business use), Van 100%

Full VAT Recovery vehicle services

Capital Allowance Claims by Customer

Lease Rental Restriction apply

Creates Employee Company Car Benefit in Kind (BIK)