Net vs. Gross in Salary Sacrifice

Net vs gross in salary sacrifice:

Looking to take advantage of  CPC Drive’s inclusive motoring package that provides an affordable way for employees to drive an electric car through salary sacrifice, but are unsure of what terms like net salary and gross salary mean? These can seem very complicated but when properly explained, offer an important explanation for how salary sacrifice provides a great way of getting an employee benefit, while making savings on National Insurance and Income Tax.

What is salary sacrifice?

Salary sacrifice is an arrangement between an employee and employer where the employee agrees to give up part of their pre-tax salary in exchange for certain benefits. These can include pension contributions, childcare vouchers, or a car. By participating in salary sacrifice, the amount employees contribute for their benefit is taken from their pre-tax salary, meaning employees can make the most of their salary.

Net vs gross:

Gross salary represents the full value of the employment package, including base salary and any additional benefits or bonuses before any deductions are applied. Think of it as the salary amount advertised on a job role. It’s the total amount. The net salary (also known as take-home pay) on the other hand is the amount of money an employee receives after various deductions, such as income tax, National Insurance and pension contributions, have been subtracted from their gross salary. The net salary therefore is what appears in the bank account on payday, while gross salary is what is earned before any of the deductions are made.

How salary sacrifice affects the payslip:

When opting for a benefit via salary sacrifice, such as a brand new car, a portion of the gross salary is redirected to pay for the benefits chosen. This means that the sacrificed amount is not subject to income tax or National Insurance contributions, resulting in tax savings. For example, if an employee’s gross salary is £30,000 annually and they decide to participate in CPC Drive’s salary sacrifice car scheme by contributing £300 per month for their car, they would reduce their salary by £3,600 a year, their gross salary will be reduced to £26,400.

As a result, on the payslip there will be a reduction in Income Tax and National Insurance contributions as the employee is now effectively earning a gross salary of £26,400. The sacrificed amount of £3,600 towards the car will not be subject to any Income Tax or National Income deductions.

Benefit in Kind

As we talk about in this article, while the deductions you make for the car are made from your pre-tax salary and so there are considerable savings to be made, salary sacrifice cars are subject to Benefit-in-Kind tax. If you choose an EV or low emission vehicle, the Benefit-in-Kind Tax (BiK) you have to pay is very low in comparison to your savings, and so there is still a financial benefit to taking a car on the scheme.

Is Salary Sacrifice right for you?

The benefits of signing up to salary sacrifice varies depending on individual circumstances and the specific schemes offered by the employer, but if it sounds of interest, CPC Drive in partnership offers the UK’s widest selection of EVs, ULEVs and petrol cars on an employee car benefit scheme. Take a look at your options by logging in.