Salary sacrifice is a tax-efficient way for employees to reduce their income and stay within a lower tax bracket. For example, someone earning £52,000 a year can opt to lease an electric vehicle through their employer’s scheme for around £350 a month. Not only does this cut costs compared to a personal lease, due to benefits-in-kind savings like zero VAT, but it also brings their direct income down to £47,800. As a result, they would fall into the Basic tax bracket, paying a lower rate of 20% on their earnings.
This tax-saving strategy can be particularly beneficial for those who are on the cusp between different tax brackets. By reducing their taxable income through a salary sacrifice arrangement, individuals can potentially save money on their tax bill. For high earners who are close to the Higher Rate or Additional Rate thresholds, this can result in significant savings. By taking advantage of schemes like employer-sponsored electric vehicle leases, individuals can effectively manage their income and tax liabilities.
In addition to reducing tax liabilities, salary sacrifice arrangements can also provide other benefits for employees. For example, leasing an electric vehicle through an employer scheme can offer savings on running costs and maintenance, as well as access to the latest technology and models. This can be a cost-effective and environmentally friendly option for individuals who are looking to reduce their carbon footprint and save money on transportation expenses.
Employers can also benefit from offering salary sacrifice schemes to their employees. By providing tax-efficient benefits like electric vehicle leases, employers can attract and retain top talent, improve employee satisfaction and engagement, and demonstrate their commitment to sustainability and corporate social responsibility. This can give businesses a competitive edge in the job market and help them to build a positive employer brand.
However, it is important for employees to carefully consider the implications of entering into a salary sacrifice arrangement. While these schemes can offer tax savings and other benefits, they may also have drawbacks such as reduced pension contributions, lower take-home pay, and potential restrictions on future earning potential. Employees should weigh the pros and cons of salary sacrifice carefully and seek professional advice if needed to ensure that they make an informed decision that aligns with their financial goals.
Overall, salary sacrifice can be a useful tool for individuals who are looking to manage their tax liabilities and reduce their income to stay within a lower tax bracket. By taking advantage of schemes like employer-sponsored electric vehicle leases, employees can potentially save money on their taxes, while also enjoying other benefits such as cost savings, access to the latest technology, and environmental sustainability. However, it is important for individuals to carefully consider the implications of entering into a salary sacrifice arrangement and seek professional advice if needed to ensure that it aligns with their overall financial strategy.
