THE official term OpRA (Optional Remuneration Payments) covers salary sacrifice. The employee agrees to take a lower salary – with income tax and National Insurance then based on the net income – and in return for the amount of sacrificed salary receives a benefit such as a brand new lease car.
Apart from the kudos of driving one of the latest lower-emission car models, and benefits in terms of fuel economy and road safety, it’s beneficial for the employee if the tax on the benefit – such as benefit in kind (BIK) tax – works out less than the tax on the difference in full salary.
They can sacrifice as much salary as they like, providing it does not leave the net sum below the National Minimum Wage.
And it’s also beneficial for the employer who saves on the employee’s sacrificed salary and Class 1 National Insurance, instead paying for the car lease and Class 1A NIC on the BIK.
The car cost includes the vehicle rent, maintenance, insurance and admin.
- Tax rules changed for new salary sacrifice agreements are subject
to change. - Scheme favours Ultra Low Emission Vehicles (ULEV) up to
75g/km CO2 - Employee sacrifices part of their salary – say £4,000 – which is then exempt from income tax and NI and in return employer pays for ULEV lease car with
maintenance, insurance etc. - Employee pays tax at the car’s BiK rate while employer pays Class 1A NIC
on that BiK - On cars over 75g/km employee pays higher tax due on either salary
sacrificed or BiK
Salary sacrifice can be a powerful way to offer a new and significant employment benefit to non-car eligible staff or car eligible staff who elect to take cash to run their own car instead of a traditional company car – a cash-for-car system that has lost its attraction with the latest ruling that if cash is offered instead of a company car, then the BiK tax will be applied on the higher of the cash sum or the car BiK.
Salary sacrifice leverages the employer’s tax and commercial position to the benefit its employees.
How does it work?
It is often cheaper for an employee to take a car as a taxable benefit instead of buying or leasing one privately out of their after-tax salary.
You can think of salary sacrifice as a way to offer employees who want new cars the opportunity to swap some of their salary for a benefit in a way that actually reduces their tax bill.
Also, because corporate discounts are often available on these cars, it saves them money on the car too. There are also significant National Insurance savings for the employer.
With cars emitting over 75g/km CO2 the employee is taxed on the higher amount of either BiK for the car or the salary sacrificed. Ultra low emission cars (ULEVs) under 75g/km CO2 – such as hybrids – are not affected, and choosing one of these benefits both employee and employer.
For most salary sacrifice drivers there are still significant savings to be made through a scheme. These savings can be made through NI, and where applicable, pension savings.
In addition, the buying power of leasing companies means that drivers also benefit from manufacturer discounts and very competitive corporate
finance rates.
In theory, your business could acquire cars itself and set up its own internal scheme. However, a ready-made scheme from a car leasing company not only takes away all the administrative hassle but the leasing company can also pass on the benefit of the volume-related price discounts it negotiates with
car manufacturers.
The leasing company may also offer additional features such as online quoting and ordering as well as motor insurance and early termination insurance, which covers against any potential charges if an employee leaves in
mid-contract.
