NHS Salary Sacrifice: Lease Cars, Bikes and the Real Cost

Most NHS trusts offer salary sacrifice schemes, the best known being lease cars and cycle to work. The idea is simple: you give up part of your salary and get a benefit in return. Because you pay less tax, National Insurance and pension on the lower salary, the benefit costs you less than it would from your take-home pay. But there are trade-offs worth understanding.

How it works

Your contract is changed so that your salary is lower by the amount you sacrifice. Your employer then provides the benefit. Income tax, National Insurance, student loan and your NHS Pension contribution are all worked out on the reduced salary.

A worked example

Take a full-time Band 6 on £39,959 who sacrifices £350 a month for a lease car. That is £4,200 a year.

• Take-home pay without the scheme: £2,429.77 a month
• Take-home pay with the scheme: £2,205.21 a month
• Real cost of the car: £224.56 a month

So a car with a £350 monthly cost really costs about £225 from take-home pay. The saving of around £125 a month is made up of income tax, National Insurance and lower pension contributions.

The effect on your NHS Pension

This is the part people often forget. Your pensionable pay is the reduced salary, so you build less pension while you are in the scheme. In the 2015 scheme you earn 1/54 of pensionable pay each year, so sacrificing £4,200 a year means building about £78 less yearly pension for each year of the scheme. Over a three-year lease, that is roughly £233 a year less pension in retirement, before revaluation.

Part of the saving above comes from paying less into the pension, so it is not all free money. It is still usually a good deal, but compare it fairly.

Lease cars and benefit in kind tax

A car provided through salary sacrifice is a company benefit, so it has a benefit in kind tax charge based on its list price and emissions. For petrol and diesel cars this can wipe out most of the saving. For fully electric cars the benefit in kind rate is very low, which is why most NHS lease car schemes now focus on electric vehicles.

Lease car schemes usually include insurance, servicing, tyres and breakdown cover, which you should factor in when comparing with buying or leasing privately.

Cycle to work

Cycle to work schemes let you spread the cost of a bike and equipment over usually 12 months through salary sacrifice. There is no benefit in kind charge, so the saving is the full tax, NI and pension on the amount. At the end of the hire period you can usually buy the bike for a small fee.

The minimum wage rule

Salary sacrifice cannot take your pay below the National Minimum Wage. Staff on lower bands, or working part time, may be limited in how much they can sacrifice. Your scheme provider will check this before you sign up.

Other things to consider

• Mortgages and loans: lenders see your reduced salary, which can affect how much you can borrow.
• Maternity and sick pay: statutory payments are based on your actual earnings, so a large sacrifice can reduce them. NHS occupational pay is usually based on your pre-sacrifice salary, but check your scheme terms.
• Leaving early: if you leave the NHS during a lease, there can be early termination charges, although many schemes waive them in some situations.

Worked example: cycle to work

A Band 5 on £32,073 joins a cycle to work scheme for a £1,200 bike, paid over 12 months at £100 a month. Because tax, National Insurance and pension are all lower on the reduced salary, the real cost from take-home pay is roughly £65 a month, so she saves around £35 a month, about £416 over the year.

How it shows on your payslip

Salary sacrifice usually appears as a deduction before tax, labelled with the scheme name, so your gross pay for tax and NI purposes is lower. Your pensionable pay is reduced too. If you see the deduction after tax instead, it is not working as salary sacrifice and you should ask payroll.

Common questions

Can I join more than one scheme? Yes, as long as the total does not take your pay below the National Minimum Wage.

What happens during maternity leave? Lease car payments usually continue. Statutory pay is based on your earnings, so a large sacrifice can reduce it. Check your scheme terms before you start.

Can I end a lease early? Only in certain situations, such as leaving the NHS or a long period of reduced pay. Early termination charges may apply.

Common mistakes to avoid

• Looking only at the headline saving and ignoring the effect on your pension.
• Choosing a petrol or diesel car without checking the benefit in kind tax.
• Not checking whether reduced pay will affect a mortgage application.

Check the real cost

The salary sacrifice calculator compares your take-home pay with and without the scheme for your band and hours, shows the real monthly cost and estimates the pension you give up.