Salary sacrifice vs cash allowance: Which one is right for me?

Should you opt for a salary sacrifice or a cash allowance for your next car?

The difference between the two can seem confusing when the end goal – getting a new car – is the same.

A company car scheme is one of the most attractive workplace benefits on offer.

But if you have a choice between the two most popular – salary sacrifice and cash allowance – working out which one is right for you can be a little tricky. 

We’ve broken down the difference between the two so you can drive safe in the knowledge you’re saving money in a car that you want.

What is a salary sacrifice scheme?

A salary sacrifice scheme is when you exchange a portion of your pre-tax salary for a non-cash benefit, such as for your pension or childcare vouchers.

An electric car salary sacrifice scheme is becoming one of the most popular schemes, however, as it allows you to access your employer’s buying power and discounts. This means that the lease costs for a brand-new electric vehicle are lower than what they would be with a Personal Contract Hire (PCH) agreement.

The way it works is that the business leases the car, and you get to drive it as an employee benefit, paying for it out of your gross salary.

It’s normally offered to people who need to drive as part of their job, or as an additional benefit to attract and retain top talent.

A salary sacrifice scheme for a car lease only works with electric cars – the added Benefit in Kind (BiK) tax on petrol and diesel vehicles, which start at 15%, cancels out the savings – but it does mean getting your hands on some of the latest cars with the latest tech for a significant amount less.

Benefits of a salary sacrifice scheme

There are numerous benefits to joining an electric car salary sacrifice scheme. These include:

• Saving on income tax and National Insurance contributions
• Saving on BiK tax
• Making newer, premium cars more attainable and affordable

Because your monthly payments for the car are taken directly out of your gross pay, this effectively reduces your monthly salary, which ultimately means paying less tax each month.

Your employer’s NIC is reduced too, so it’s a win-win situation for you and them.

And with BiK rates on electric cars fixed at 2% until April 2025, you’ll pay significantly less company car tax than you would with a combustion engine vehicle.

What is a cash allowance?

A company car allowance scheme is where you get a set amount of money added to your salary, with the view that this will be used to buy or lease a car and cover the costs of running it.

You’ll be responsible for finding the car and buying or leasing it yourself. This means if you do want to lease a car, you’ll be looking at a PCH lease instead of a business lease – which can work out more expensive.

However, unlike with a salary sacrifice scheme, there are no limits on the sort of car you can get. 

The money is essentially yours to do what you want with, so you can treat yourself to a brand-new lease or get by with an old banger. Just bear in mind that as part of your allowance, your employer might specify how old the car can be, and how many miles it can have on the clock as part of their grey fleet management policy.

And because the money is added directly to your salary, you won’t have to pay extra BiK tax, but you will pay Income Tax and National Insurance on the car allowance.

It’s worth taking this into consideration when you’re making your decision, because if you’re already in a higher tax bracket you’ll end up paying a lot more on the allowance, and if you’re close to the higher bracket it might be the car allowance that nudges you over the line.

Which one is right for me?

Whether you should go for a salary sacrifice scheme or a cash allowance is going to be a personal choice that varies from person to person.

There are a number of factors you’ll need to consider to make the choice, which include:

• Cost and tax considerations
• Ownership considerations
• Whether you want a new or used car
• If you have the ability to drive a BEV vehicle

Cost and tax

Company car allowances aren’t tax-free, though you won’t have to pay BiK tax, so it’s worth considering which scheme would work out to be the more expensive one for you based on how much Income and National Insurance tax you’d end up paying. 

With a cash allowance, you’ll pay more tax, but with a salary sacrifice vehicle, you’d pay less NI and Income Tax, but you would be subject to Benefit in Kind tax. 

There are also savings to be had on a salary sacrifice scheme beyond the tax savings, because they often include running costs like maintenance, repairs and insurance, and the total cost of ownership tends to be lower. 

Ownership

If you go for the salary sacrifice scheme, you will be leasing a car and will have to return it to the funder at the end of the lease. It does mean you have the freedom to then lease a new car and potentially upgrade to a newer, better model.

But if ownership is important to you, a cash allowance might be the better option.

There are no restrictions on what type of car you buy (or lease) with a car allowance and no limits on what you can spend beyond your allowance if you have the means. You can buy an old, used car if that’s what suits your requirements, or go for something brand-new and whizzy.

If brand-new, but cost-effective, is what you’re after – an electric car salary sacrifice scheme will tick every box.