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Salary sacrifice Is it better to join a salary sacrifice car scheme or take car allowance?
  • Dec 19, 2022

  • 7 min read

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Is it better to join a salary sacrifice car scheme or take car allowance?

Company cars are one of the most attractive workplace benefits on offer. But if you're not sure about the company car scheme options that are available it can be easy to get confused by the different terms and jargon.

One question that many people ask is whether it’s better to join a salary sacrifice car scheme or take car allowance. We’ve created this guide to give you all the information you need to compare the different car schemes against each other and decide which one will work best for you.

What is car allowance and how does it work?

A company car allowance scheme is where you get a lump sum of money added to your salary by your employer, which you can use to buy or lease a car, as well as cover the costs of running it.

With a car allowance, you’re responsible for finding and buying or leasing the vehicle yourself, as well as taking care of maintaining and insuring the car. There are no limitations on the sort of vehicle you can get with a car allowance, and the money is essentially yours to do whatever you want with.

Is car allowance a taxable benefit?

A company car allowance is a taxable benefit, so you’ll likely have to pay tax on it.

The car allowance is added to your salary (usually to your monthly pay), so it gets taxed at the same rate as your salary. This means that you’ll have to pay personal Income Tax and National Insurance on the car allowance.

It’s worth bearing this in mind to help you work out whether paying the extra car allowance tax makes the car allowance worth it for you. If you’re already in a higher tax bracket you’ll end up paying a lot of tax on your car allowance, and if you’re edging close to the higher tax rate threshold, the allowance might push you into the next tax bracket.

On the plus side, you don’t have to worry about Benefit-in-Kind (BIK) tax with a company car allowance.

What is a company car scheme and how does it work?

​​A company car lease scheme is where a company offers its team a vehicle for personal and business use. The business leases the cars for their team, and the team members get to take the car as an employee benefit. They’re usually offered to those who need to drive as part of their job, or as an added work benefit to attract and retain top talent.

A popular company car lease scheme is the EV salary sacrifice scheme.

Electric Vehicle (EV) salary sacrifice is a ​​car lease scheme where you give up part of your salary in exchange for a benefit - in this case, an EV. When you join a salary sacrifice scheme, you pay less Income Tax and National Insurance contributions than if you were to pay for the car out of your own pocket.

In fact, with Octopus Electric Vehicles, you can save up to 40% on the cost of an electric vehicle through salary sacrifice. Here are just some of the benefits of using salary sacrifice to get a new car:

  • You save on Income Tax and National Insurance contributions

With salary sacrifice, your monthly payments come straight out of your gross pay, which reduces your monthly salary. Because of this reduction in salary, you’ll pay less Income Tax and National Insurance. It’s a win-win situation, because your employer’s National Insurance payments are reduced too. Meaning when ​​it comes to cash allowance vs salary sacrifice scheme for employers, salary sacrifice can be a more attractive choice for both employer and employee thanks to the tax savings they can both make.

  • You’ll also save on Benefit in Kind (aka company car tax)

You’ll need to pay BiK tax and tax on your fuel allowance depending on the type of scheme. Current company car BiK rates start at 15% for petrol and diesel cars, but if you opt for an electric vehicle, the BIK rate is just 2% until 2025.

  • You can drive a newer, more premium car than you could afford in cash

Want to drive the latest model but don’t have the savings to buy your dream car outright? Salary sacrifice schemes let you pay for the car on a monthly basis, instead of paying it off in one lump sum. Getting you access to models you wouldn’t otherwise be able to afford.

With Octopus Electric Vehicles, you get to choose from the best range of electric cars. We've even pre-ordered cars to get you on the road quicker.

What does a company car scheme include?

Typically salary sacrifice car schemes include the essential extras that come with car ownership, including servicing, maintenance and insurance.

We offer the whole package with EV salary sacrifice, with absolutely everything you need to hit the road. Our package includes a brand-new, top spec car, a free home EV charger plus standard installation, super cheap EV energy tariffs, car insurance, servicing, maintenance, breakdown - you’ll even get replacement tyres included too..

Car allowance vs salary sacrifice: which one is right for me?

When deciding between salary sacrifice and taking a car allowance, it’s important to consider a number of factors:

Cost and tax considerations

Company car allowances aren’t tax-free, and so could be more expensive for both you and your employer, depending on your circumstances.

A salary sacrifice car scheme can work out to be better value than taking a taxable cash allowance. If you're in the higher rate tax bracket, you'll pay less tax by giving up your cash to fund a car through salary sacrifice. You won't have to pay National Insurance contributions on your car if you join a salary sacrifice scheme either, so that also saves money.

There are also savings to be made on a salary sacrifice car scheme with running costs like maintenance, repairs, servicing and insurance, because they might be covered by the scheme, just like they are with Octopus Electric Vehicles.

So it comes down to what kind of savings are more valuable to you. If it's cash in your pocket and paying more tax you might opt for the car allowance. But if you’d prefer to make real life savings on tax, then go for the salary sacrifice scheme.

Ownership considerations

If you decide to take a car allowance, there are no restrictions on what type of car you can buy and there are also no limits on how much money you can spend.

With salary sacrifice schemes, you don’t own the car, so you’ll have to return it at the end of the agreement. This means you then get the freedom to lease a new car and upgrade to the highest new tech models available. With Octopus Electric Vehicles, ​​you can choose from the best range of electric cars.

Car allowance and salary sacrifice: the bottom line

By now, this guide should have given you enough information to help you decide which scheme works best for your needs. If you’re looking for a way to save money on tax and get a better deal on a car, a salary sacrifice scheme is a great option.

If you’re unsure, or still have questions, we’re on hand whenever you need us. And if you do want to join the scheme to get your team access to the best EVs, it’s totally free and we can get you set up and ready to go in as little as two weeks.