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Written by Rob Buckland

There are a few ways an employer can include a car or money towards one as part of your pay and benefits. The two traditional options have been a company car or a car allowance, but in more recent years salary sacrifice schemes have emerged as another option. Which is best for you: a company car, a car allowance, or a salary sacrifice scheme?

How does salary sacrifice work for a car?

If you sign up to a salary sacrifice scheme, you forgo a portion of your pre-tax salary in exchange for a car leased by your employer.

It’s the ‘pre-tax’ bit which is important, and a key difference between a salary sacrifice scheme and a regular company car. Because the sacrificed amount is taken from your salary before tax is deducted, you don’t pay income tax or National Insurance on it.

Pros of car salary sacrifice schemes

There are several advantages to a salary sacrifice scheme:

• Because payment is taken from your gross (pre-tax) salary, you pay less tax. What’s not to like about that?
• The initial payment at the start of the agreement may be very low, or it’s possible that you will simply make the regular monthly payments with no higher bill at the start of the agreement.
• Everything is included in our scheme. You won’t need to arrange insurance, servicing, MOTs or even breakdown cover. We’ll even replace tyres and wiper blades when they wear out! 

Cons of car salary sacrifice schemes

In most circumstances, a salary sacrifice scheme has more upsides than downsides, but there are some disadvantages to keep in mind:

• Salary sacrifice for a car reduces your take-home pay, which may impact your pension contributions, life insurance, and mortgage eligibility. Be sure the reduction won’t negatively affect these areas.
• A salary sacrifice scheme will commit you to a fixed period with your chosen car. If you want more flexibility, then such a scheme may not be for you.
• Any leasing agreement, whether funded through a salary sacrifice or not, will have an annual mileage limit. Penalty charges will apply if you drive further than set out in the terms of the lease.
• If you would like to own the car at the end, then a salary sacrifice scheme isn’t suitable. There’s no option to own the car at the end of the agreement.

Learn more about the pros and cons of salary sacrifice car

How does a car allowance work?

A car allowance is when an employer adds to an employee’s salary for the purpose of funding a car. Although this sum is for a specific purpose, it’s down to you as the employee as to how you pay for the car. You could choose a lease, a Personal Contract Purchase, or buy the car outright. You could choose to buy a used car rather than a new one.

Pros of a car allowance

There are several advantages to funding your next car through a car allowance scheme:

• Nothing beats a car allowance if you want to make an entirely independent choice. You can buy what you want, how you want. If you own the car outright, then there’s no mileage restriction to worry about either.
• If owning the car rather than leasing it is important to you, then you can buy a car with the car allowance. That way it is truly yours rather than belonging to a contract hire company.
• The point of car allowance is that it’s spent on a suitable car. However, in practice, the employer doesn’t expect every penny to be accounted for, or that all the money needs to go towards a vehicle. You could spend less and keep the difference as extra salary.

Cons of a car allowance

A car allowance scheme has a number of disadvantages as well as benefits.

• Don’t make the mistake of thinking a car allowance is something for nothing. It’s applied to your pre-tax salary, so your tax bill will be higher if you have a car allowance added to your monthly pay packet.
• Buying a car privately is usually more expensive than using salary sacrifice or a company car, especially for electric or low-emission models. Tax breaks, which make these cars attractive to business users, don’t apply if you are buying the car privately.
• If you own the car, you will have to cover the cost of servicing and maintenance. Depreciation - a car’s loss in value over time - will also come back to bite you eventually, whereas with a lease it’s the leasing company taking the risk.

How does a company car work?

A company car is a vehicle which the employer pays for and which the employee is allowed to use for private miles as well as on business. Because the driver doesn’t pay for the car, it’s considered a benefit for tax purposes. The employee pays benefit-in-kind tax for this perk, with the amount depending on the value of the car, the car’s carbon dioxide emissions, and the employee’s income tax band.

Pros of company car scheme

There are many good reasons to choose a company car:

• A company car usually works out cheaper than buying or leasing a car privately. The savings are particularly compelling if you choose an electric car, or any model with low emissions.
• Since a company car is available for you to use but you never own it, you don’t have to worry about the cost of selling it on.
• You know how much you’ll have to pay in tax each month, so budgeting is straightforward. Maintenance and servicing costs are also usually covered by your employer.

Cons of company car scheme

It’s not all good news. There are some disadvantages to running a company car:

• Company car drivers may have to choose from a narrow range of cars rather than being able to pick whatever make and model they would prefer.
• There’s likely to be a limit to the number of miles you can cover before a penalty charge applies.
• The car never belongs to you. That may not matter at all, or it could be a deal-breaker, depending on whether owning the car is something you think is important.

Salary sacrifice, car allowance and company car: which is best for you

You can have an in-depth look at salary sacrifice schemes vs company cars and car allowance. Here we summarise the basics:

Salary sacrifice: this is the best bet if you want to pay as little as possible, especially if you intend to run a car with low emissions.

Car allowance: this suits someone who is attached to owning their own car and wants maximum flexibility as to what they drive and how long they keep the car.

Company car: this offers many of the same advantages as salary sacrifice, but without the tax saving of taking the BIK payment from the pre-tax salary. It’s a very good option if your employer doesn’t offer a salary sacrifice scheme.

Salary sacrifice vs car allowance vs company car FAQs

Is a salary sacrifice car the same as a company car?

No, but it’s similar. In both cases the employee makes a benefit-in-kind tax payment for the car, but with a salary sacrifice scheme this amount comes out of the pre-tax salary, which saves some extra money.

Is it cheaper to get a car through salary sacrifice?

To some extent it depends on the car, but as a rule a salary sacrifice scheme is a very cost-effective way to run a new car. Salary sacrifice is especially appealing if you want to run a low-emissions car or an electric vehicle.

Is salary sacrifice better than car allowance?

If you want to run a new car and are open to driving an electric vehicle or a low-emissions hybrid, then salary sacrifice is a better bet than a car allowance. On the other hand, if you value flexibility and want to own the car you drive, then choose an allowance if your employer offers one.

Is it better to have a car allowance or company car?

It depends. A car allowance gives you more options in terms of what you drive, whether to run a new or used car, and how long you keep the vehicle. A company car is less flexible but usually works out better financially, especially if you choose a car with low emissions and a favourable BIK banding.