What Is Salary Sacrifice?
An employee gives up the right to receive part of their income due under their contract of employment. The employer then agrees to provide the employee with some form of non-cash benefit (such as a car). Because the cost of the non-cash type benefit is deducted from the employee's gross salary, before statutory deductions, the employee can enjoy significant income tax and NIC savings on the salary sacrificed. The scheme has historically been used to provide options to increase pension payments. the scheme is now being used to deliver other benefits, including child-care vouchers, bikes and work-place car parking.
How Does it Work?
In terms of the employee offering a vehicle, the employee makes a regular payment on the lease of the vehicle, direct from their gross salary entitlement. this reduces their salary and therefore cuts the National Insurance payable on both sides.
The vehicle contract is with the leasing company, but delivered through the employer, therefore giving the employee the opportunity to enjoy a new car with the cost advantages that come with contract hire agreements.
Savings are achieved on National Insurance, as contributions are only paid on salary, not the benefits - so lower salary, lower National Insurance.
The employee also enjoys the NI savings in addition to a decrease on income tax. Salary Sacrifice based car scheme also gives an enhanced option as part of an employer's flexible benefits package, the scheme can also help an organisation manage their "Grey Fleet"