Salary sacrifice is almost always talked about positively due to its ability to reduce our overall tax burden. Whether it is used for pension contributions or agreeing to a salary sacrifice car, it is seen as an effective way to reduce the amount we pay to the taxman across our lifetime.
However, when you are engaged in active debt management, some extra considerations may go against this conventional wisdom.
Salary sacrifice has a direct impact on your salary, clearly. But whether it is voluntary or not, your reduced income has an impact on affordability assessments in the eyes of lenders.
Lenders assess you on gross salary figures, and they will typically see your reduced take-home calculation. While they may know the context of the sacrifice, a £10,000 sacrifice on £50,000 earnings is not just a ~15% reduction in take-home pay; it could be a 75% reduction in perceived disposable income, depending on other commitments.
The challenge here is that when the high-interest debt needs refinancing or it is time for remortgaging, you may be faced with fewer lending options and worse terms. While the added cost of increased interest may well be less than the tax saved from the salary sacrifice, it is still worth calculating. Plus, in some cases, you may be pushed out of bank loans entirely, leaving you with no option to use a payday loan company.
The question of when is it a good idea to go into debt is highly dependent on the person. But beyond the rate of interest and the use of money, the commitment itself plays a big role in the decision.
While salary sacrifice pension contributions are a very flexible commitment (you can typically pause them on a month-to-month basis), others can lock you in. The cycle-to-work scheme is often 12-18 months and cannot be paused, while a car lease could be up to four years with early termination fees.
When assessing if salary sacrifice is worth it for a car, the more committed you are to wanting a new car (with or without the scheme), the more straightforwardly beneficial the scheme becomes. But such commitments are not just to the repayments and their impact on your creditworthiness; you are also committing to the job. And, it is well studied now that those who frequently go from job to job achieve bigger and faster pay rises. So, indirectly, you may be hindering your future creditworthiness by staying statically in your workplace.
Is a salary sacrifice worth it in the UK? The answer may depend on whether you are a basic or higher rate taxpayer, as the tax savings are 28% and 42%, respectively. Higher earners can not only incur more debt interest while still being overall better off, but their creditworthiness may also be less sensitive to the sacrifice.
But, before making any commitments, it is important to explore the other risks discussed in this article.
Factors to Consider when Financing a Car
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