What are the Disadvantages of Salary Sacrifice Car Schemes?

Salary sacrifice car schemes have surged in popularity, especially for electric vehicles (EVs), offering substantial tax savings and financial perks. But are there downsides?

While the advantages are widely advertised, it's essential to weigh the disadvantages of salary sacrifice car schemes for both employees and employers.

Let’s explore when a salary sacrifice scheme might not be the best option for you.

Disadvantages of Salary Sacrifice for Employees

1. Salary Reduction can Impact other Finances

Participating in a salary sacrifice scheme reduces your gross salary. While this saves on tax and National Insurance (NI), it can have knock-on effects on other financial areas, such as:

• Mortgage and Credit Applications: A lower salary could impact your eligibility or borrowing capacity.
• Pension Contributions: Reduced salary might mean smaller contributions to your workplace pension.
• Life Insurance and Maternity Pay: Benefits tied to your salary (e.g., life cover, statutory maternity pay) may also decrease.

If your salary drops close to or below the minimum wage threshold, you won’t be eligible to join the scheme.

2. Lack of Flexibility

Once you enter a salary sacrifice agreement, there’s little flexibility to change your mind. You can’t simply hand back the car or exit the agreement early without facing penalties. For those who value flexibility, this can be a significant disadvantage.

3. Restricted Mileage

Most salary sacrifice schemes include a mileage cap, typically between 5,000 and 10,000 miles annually. While you can increase your mileage allowance for an additional cost, it’s not always easy to adjust mid-contract.

For employees with unpredictable commutes or long-distance travel needs, restricted mileage can make the scheme less suitable.

4. Not Ideal for Lower Incomes

If you’re on a lower income, salary sacrifice might not be financially beneficial. The deduction could put you under financial strain, particularly when factoring in rent, loans, or other large monthly expenses.

Employers also cannot allow employees to participate if it risks taking their earnings below the legal minimum wage.

5. No Option to Own the Car

If you’re looking to purchase the car at the end of the agreement, salary sacrifice schemes are not ideal. Most schemes operate on a lease model, meaning you hand the car back when the contract ends. If buying the car is important to you, financing or outright purchase may be better alternatives.

Why Avoid Salary Sacrifice for Petrol or Diesel Cars?

While salary sacrifice works exceptionally well for electric cars, it’s far less attractive for petrol or diesel vehicles. Here’s why:

• High Benefit-In-Kind (BIK) Tax: Electric cars currently have a BIK tax rate of just 2% (as of 2024/2025). In contrast, petrol and diesel cars can attract rates as high as 37%, significantly increasing your tax bill.
• Higher Running Costs: Petrol and diesel cars come with higher fuel, maintenance, and road tax costs compared to EVs.
• Environmental Impact: With increasing emissions regulations like ULEZ and CAZ zones, driving a petrol or diesel car can result in additional charges and restrictions.

Disadvantages of Salary Sacrifice for Employers

1. Financial Risk When Employees Leave

If an employee leaves the company mid-contract, the responsibility for the car payments often falls to the employer. Employers typically have two options:

• Continue paying the remaining monthly costs.
• Pay an early termination fee, which can be expensive.

Solution: Employers can mitigate this risk by opting for Early Termination Protection (ETP). ETP covers scenarios like resignation, long-term sickness, or loss of driving licence due to medical reasons.

2. Maternity, Paternity, and Adoption Leave

If an employee goes on statutory leave, the employer is legally obligated to continue providing the vehicle. Since salary cannot be deducted from statutory pay, the employer must cover the car’s cost during this period.

3. Administrative Burden

Managing a salary sacrifice scheme can require considerable admin. Employers without dedicated fleet teams may struggle with tasks like mileage monitoring, contract management, and handling early terminations.

At Rivervale, we provide full administrative support to lighten the load.

When is Salary Sacrifice Not Worth It?

To recap, salary sacrifice car schemes may not be worth it if:

• You are on a lower income, as the salary deduction could affect your financial stability.
• You plan to purchase the car at the end of the lease.
• You require flexibility and don’t want to be tied to a contract.
• Your annual mileage is unpredictable or exceeds the agreed cap.
• You prefer petrol or diesel cars, as the tax savings are far less compared to EVs.

Is a Salary Sacrifice Car Scheme Right for You?

While salary sacrifice car schemes offer fantastic benefits, particularly for electric cars, they’re not the perfect fit for everyone. Employees and employers alike must carefully weigh the disadvantages against the advantages.

If you’re ready to explore the best salary sacrifice options for your needs, we can help streamline the process and eliminate the guesswork.