Business Leasing vs Salary Sacrifice. Which is best for your business?
Business owners and employees can lease a car through their business to reduce the amount of tax they pay and get all of the benefits of driving a brand new car.
Our customers often ask us “what is the difference between business leasing and salary sacrifice?”
To help you make the right choice for you we’ve written this guide to explain the difference.
Is business car leasing right for me?
Business leasing or business contract hire (BCH) is an employer benefit. It’s a tax-efficient way to lease a car when you mainly use the car for business. This option is best for people who get most of their income from dividends, rather than a salary. Shareholders and company directors would usually be paid through dividends.
With business contract hire you pay the same benefit in kind tax (BiK) as you do leasing a car through salary sacrifice. If your business meets the VAT threshold of £85,000 annual turnover, you’ll get 50% off VAT on the contract hire and the monthly payments are likely to be lower. With business contract hire you won’t get some of the package benefits as salary sacrifice like the early termination protection. As it’s likely that you own the business or are a shareholder of the business, you wouldn’t typically need those protections anyway.
Bottom line: if you’re mainly paid via dividends, business contract hire is the best option for you.
Is salary sacrifice right for me?
Salary sacrifice should be viewed as an employee benefit scheme for your company. A salary sacrifice scheme enables salaried employees to pay for their electric car using gross pay, helping them make savings on Income Tax and National Insurance.
Plus Benefit in Kind (or company car tax) is low at just 2% for electric cars. The Benefit in Kind (BiK) rate is set by the government. It’s worth noting this is currently fixed until April 2025 at 2%, and will then increase by 1% each year until 2028. An increase in BiK would increase the amount you pay for your car.
Our salary sacrifice scheme includes some great additional benefits like early termination protection, parental leave, end of contract damage waiver, long term sick protection and insurance.
Bottom line: If you are paid mainly through a salary, salary sacrifice is the best option for you.
Choosing between business contract hire and salary sacrifice should be an easy choice, depending on your circumstances, and we always recommend speaking to your accountant or tax advisor before making your decision.