A lot of our customers often ask us questions about the differences between business leasing and salary sacrifice. So we decided to speak to our financial and EV Specialists to find out which way of financing worked best for which customers:
The answer is that they are not mutually exclusive and today is about helping you to understand whether salary sacrifice, business contract hire or both is best for you and your company.
Business Contract Hire:
This is a tax efficient way to hire a car for people that do business miles, particularly for those not mainly remunerated by salary for tax planning purposes. If you're reading this as an owner of a small business, you may well be paying yourself a small salary up to your personal allowance and dividends thereafter. In this case, business contract hire is likely to be the most efficient way for you to get an electric vehicle through your business.
Through business contract hire, you have the same benefit in kind treatment as salary sacrifice, the business gets 50% off VAT on the contract hire (if they pay VAT), and the monthly payments are likely to be lower, without some of the package benefits (like early termination cover).
What are the tax experts saying?
"Whilst there could be a couple of scenarios that logically could make taking a car through salary sacrifice a good option for company directors / shareholders, it normally makes more sense to use business contract hire especially given the types of cars these individuals are buying and the way their remuneration is normally structured."
Jeff Whitcombe - Tax Adviser
This is something that should be viewed as a benefit scheme for your company. One of the key benefits is enabling salaried employees the ability to pay for their electric car using gross pay, and with 1% benefit in kind*. Start by asking yourself, are you, or the person looking to lease an EV, remunerated mainly via salary? If so, this is likely going to be a very efficient scheme to use. If not, consider business or personal contract hire as a simpler and more effective solution.
Another great benefit of a salary sacrifice scheme is that it can include early termination protection, parental leave and more - you can find more about that here, and support for the business around the payroll management. Therefore it's a benefits package that is easy to understand and very tax efficient for those who take part.
*For 21/22, rising to 2% over 4 years. Details outlined below
Hopefully this is making sense and you are getting some clarity on what option is likely best for you and your business. A handy way to think about the difference is salary sacrifice is predominantly an employee benefit, whereas Business Contract Hire is an employer benefit.
We hope this helps you to demystify the salary sacrifice vs. business contract hire debate. It should, hopefully, be a relatively simple choice depending on your circumstances, but we would always highly recommend speaking to your accountant or a tax adviser before making a decision.