Impact on salary, other company payments and tax

How is my pay affected with a Salary Sacrifice Scheme? Continue Reading

17th Aug 2023 |
Impact on salary, other company payments and tax

Impact on salary, other company payments and tax

How will my pay be affected if I participate in the Scheme?
If you decide to take part in the Scheme your total gross pay will be reduced by an agreed amount and in return your employer will provide you with a fully maintained and insured zero-emission company car.

The sample payslips illustrate how your payslip is likely to change if you participate in the Scheme, and highlight the potential income tax and NIC savings available.

I have a cash allowance - what will happen to it if I join the Scheme?
If you continue to receive a cash allowance during the contract period, the cash allowance will be included in your payslip as usual. The sample payslips illustrate how your payslip is likely to change if you continue to receive a cash allowance during the contract period.

Alternatively, your employer may choose to withdraw your cash allowance and reduce the gross salary sacrifice accordingly.

Why do I need to agree to a reduction in pay to enter the Scheme?
To meet HMRC requirements, your pay must be contractually reduced in order for you to take advantage of the income tax and NIC savings associated with salary sacrifice. As set out in the sample payslips, savings are available if you formally sacrifice gross, pre-tax salary as you will no longer pay income tax or NIC on that part of your salary.

How will participation in the Scheme affect the amount of income tax and NIC I pay?
You will no longer pay income tax or NIC on the gross salary you give up. But as the car is a company car, and therefore a taxable benefit, you will pay income tax on the value of the benefit in kind ("BiK").

Please see the worked example below.

Why do I have to pay BiK tax on the car benefit?
Because you are acquiring a leased car via your employer that is available for your private use it is classed as a company car and therefore a benefit provided by reason of your employment. You have to pay "BiK" tax on a company car as you do on most benefits provided by your employer.

How do I calculate the BiK tax to be paid on my new car?
If you are close to the threshold between tax rates (e.g. basic rate/higher rate) the tax you pay may have to be split between the two rates, but the example below is a guide to the calculation for the current tax year.

Example 1
If you are a basic rate taxpayer and choose a zero emission car with a list price of £25,000 then in 2023/24 your annual BiK tax would be £100, as calculated below.

(£25,000 List price   x   2% BiK percentage)   x   20% Your tax rate

Example 2
If you are a basic rate taxpayer and choose a plug-in hybrid car with a list price of £25,000, emissions below 51g/km, and a zero emission range between 70 and 129 miles, then in 2023/24 your annual BiK tax would be £250, as calculated below.

(£25,000 List price   x   5% BiK percentage)   x   20% Your tax rate

HMRC provides an easy to use tax calculator online.

Please note that BiK tax is collected via a reduction in your tax-free pay, so you will not see a separate monthly amount in your payslip but a change to your tax code which will increase the amount of income tax deducted from your pay each month.

What are the BiK percentages for electric cars?
The BiK percentage for all zero emission cars has been frozen at 2% until 2024/25. It will then rise by 1% in each of the next three tax years, thereby rising to 5% by 2027/28.

Will my tax code change immediately?
After the car has been delivered your employer will inform HMRC that you have been provided with a company car. HMRC will then arrange for your tax code to be changed so that the income tax can be deducted from your monthly pay. This may take several weeks, but it is possible this may be speeded up if you amend your own tax code via HMRC's online portal.

As soon as HMRC confirms your revised tax code to your employer the income tax due on the company car can be collected. As this may take several weeks you should note that the first collection may include more than one month's company car tax.

What happens if the taxation on company cars increases?
The government has already announced the rates of BiK tax to be applied to zero emission company cars until 2024/25, after which they will increase by 1% each tax year for the following three years. However, these increases should be greatly outweighed by the significant, overall savings available under the Scheme.

If I participate in the Scheme will it affect any other payments or benefits made by the Company?
As noted in the sample payslips shown at Appendix 1 (which is avaialble upon request), we use the term "Reference Salary" to mean your original salary before taking account of any salary sacrifice adjustment and the term "Revised Salary" to refer to your salary after the sacrifice.

Your participation in the Scheme should not affect any other salary-related earnings as all future pay rises, salary related pay and benefits provided by your employer, including bonuses, commissions, overtime and shift premium, should continue to be based on your "Reference Salary".

Will my Pensionable Salary remain the same?
Your Pensionable Salary should be unaffected and continue to be based on your "Reference Salary".

What about Pension and Death in Service benefits?
These benefits should continue to be based on your Pensionable Salary, which will be the "Reference Salary" and should therefore not be affected.

How will I be recompensed if I use my car on business?
As a car provided under the Scheme is a company car the amount you may be reimbursed tax free when using your car on business will be determined either by the cost of electricity, or HMRC's Advisory Electricity Rate ("AER"), which is currently 8p per mile. Please visit HMRC’s guidance for further details.

To claim reimbursement for business mileage you should submit a claim via your employer’s expenses portal, listing your car as a company car to ensure the correct mileage rate is paid.

Prior to joining the Scheme, if you used your own car on business, your employer was able to reimburse you using the tax-free Approved Mileage Allowance Payments ("AMAPs"), or you could claim Mileage Allowance Relief ("MAR") if your employer paid you a lower amount; MAR is income tax relief on the difference between the maximum AMAPs and the amount you were reimbursed.

Company car drivers cannot claim MAR if they are reimbursed less than the cost of electricity or the AER, and if your employer continues to reimburse you at a rate that exceeds the AER or the cost of electricity used on your business journeys you will have to pay income tax and NIC on the difference.
I have a fuel card - will I be able to continue to use it to charge my car via the public network?
Many fuel card providers now provide a combined fuel and EV charge card solution which enables cardholders to charge via the public charging network as well as refuelling at petrol stations.

What if I need a reference for a mortgage or a loan?
Many mortgage lenders are familiar with the concept of salary sacrifice and run similar schemes for their own employees. When responding to any mortgage lender’s request for information regarding salary, your employer should confirm the amount of your "Reference Salary", that is your salary before the application of the salary sacrifice.

Do you have more information for me?
Absolutely. We have a full brochure on all ‘Frequently Asked Questions’ regarding Salary Sacrifice which is accessible here. Alternatively, you can call our Account Team on 0344 264 4177

Back to Articles

WhatsApp Us

Back to top