One of the biggest benefits of the salary sacrifice car scheme is the ability to save money compared to a normal car lease.
Let’s look at a simplified example to see the difference:
Normal Car Lease
- Annual Salary: £30,000
- Income Tax and National Insurance: Let's say you pay roughly £6,000 in taxes (this is simplified for illustration).
- Post-Tax Income: £24,000 (the money you have left after taxes)
- Monthly Lease Payment: £300
- Annual Lease Cost: £3,600 (£300 x 12)
- Take-Home Pay After Lease: £20,400 (£24,000 - £3,600)
Salary Sacrifice Lease
- Annual Salary: £30,000
- Salary Sacrifice Amount: £3,600
- Taxable Salary After Sacrifice: £26,400
- Income Tax and National Insurance on £26,400: Let’s say you pay roughly £5,000 in taxes (again, simplified).
- Take-Home Pay After Taxes: £21,400 (£26,400 - £5,000)
Why It’s Cheaper
- Tax Savings: By using salary sacrifice, you only pay tax and National Insurance on £26,400 instead of £30,000. This reduces your overall tax bill. In this example, you save around £1,000 in taxes.
- More Efficient Use of Income: The money used for the lease comes out before tax, making each pound you spend on the lease more valuable. In other words, you’re using your gross income rather than your net (post-tax) income to pay for the lease, which is more efficient.
Summary
- Normal Lease: You pay for the car lease with money left after paying taxes, with no tax benefits.
- Salary Sacrifice Lease: You pay for the car lease with pre-tax money, reducing your taxable income and saving on income tax and National Insurance.
Overall, salary sacrifice works out cheaper because it leverages the tax advantages by lowering your taxable income, thus reducing the amount of tax you have to pay. This makes leasing a car through salary sacrifice more cost-effective compared to leasing a car normally.