NHS car leasing – highway to heaven or road to hell?

At first glance leasing a car through NHS Fleet Services looks attractive. As an NHS professional, you could get a high-end car with lower-end costs, and if it’s electric, a low benefit in kind may well sweeten the deal.

But is it right for you, and what other options are there to consider?

Let’s start with the basics

Assuming you have excluded buying a car with cash or using a car loan, your two main alternative options are: 

1. Personal Contract Purchase (PCP) and
2. Leasing

Both have become an increasingly popular option for individuals looking to finance a new vehicle.

Leasing

Leasing is a simple arrangement where you at no time own or have the possibility of owning the vehicle. You pay an initial lump sum payment, usually a multiple of the monthly payments, followed by a set payment each month. At the end of the agreement, you hand the vehicle back. Charges apply for additional miles or damage.

Personal Contract Purchase (PCP)

PCP is a type of car finance that allows customers to make lower monthly payments compared to traditional car loans. It operates on the principle of deferring a large portion of the car’s cost to the end of the agreement, creating an optional final payment known as the “balloon payment”. 

However, it’s essential to carefully consider your financial situation and long-term plans before entering either.

While the lower monthly payments may seem appealing, there is a risk of negative equity if the car depreciates faster than anticipated or if excessive mileage or damage happens, incurring extra charges. Moreover, the interest rates and terms can vary significantly between lenders and dealerships, making it crucial for individuals to shop around and compare offers.

How does the NHS car lease work?

The car lease is facilitated via a salary sacrifice system, whereby you agree to exchange part of your salary before tax and national insurance to gain additional non-cash benefits from your employer. The lease will lower your salary and reduce tax and national insurance. Your pension is correlated to your income – so you can see the relationship. 

How will car leasing impact the different NHSPS schemes

Your car lease can potentially impact your benefits during retirement. How and to what extent depends on which scheme you are a member of. When you come to draw your NHS pension, your car lease history can have a lasting effect if you are not careful.

The 1995 pension section of the NHS pension scheme bases benefits in retirement on the best income of the last 3 years, meaning using salary sacrifice in the run-down to retirement would have a long-term disadvantage. Reducing your income in these vital years would result in you receiving a smaller pension for the rest of your life, all for the sake of a new car while working. 

The 2008 pension section of the NHS pension scheme bases benefits on the best average of three in the last 10 years.  However, pay grades will need to be factored in. For instance, few consultants reach the top of the pay grade in their early fifties, so the best three years are more likely to be closer to retirement.

The 2015 pension section is a career average, so a lower income each year will cause a lower career average. Again, this would result in a smaller pension for life in retirement. In effect, there is a cost associated with the car when you start to draw your pension which is payable for the rest of your life.  

Anything else you should consider?

Annual allowance

The deemed value of your NHS pension scheme will increase when the lease ends as you will see an end to the salary sacrifice, and this will appear as an increase in income, although in reality, it is merely a return to your full, un-sacrificed pay. Therefore, the return of the lease car is a potential trigger for an annual allowance spike. With the previous annual allowance of only  £40,000, this was a real concern for many as it could lead to further tax liabilities.  The increase in the annual allowance to £60,000 per annum and the ability to use unused relief in the three previous years may lower the chances of an annual allowance liability but does not remove it.  

We have witnessed numerous changes to pension legislation in recent years. As a result, you should be aware that future changes could impact decisions made today. Additionally, the annual allowance calculations are being adjusted in light of the McCloud remedy and are expected to be available by October 2024. Making informed decisions about the potential impact on your annual allowance position is challenging, without having all the relevant information.

Again, the level of impact will vary depending on the pension scheme or schemes you are a member of, amongst other things. 

If we consider the end of your car lease and you currently have a £500 per month salary sacrifice, terminating this lease will result in a £6,000 gross increase in your annual income. Coupled with any additional income increases from normal progression, this raises the likelihood of exceeding your annual allowance, potentially resulting in a tax charge.

Mortgages

Salary Sacrifice may impact your mortgage as your income will be lower, thus affecting the maximum sums you can borrow.

If you are still interested in using NHS Fleet Services, is there anything else you should contemplate?

1. Consider your timing during the tax year. For instance, the month you take it out can have an impact – if it’s halfway through a tax year, it can spread the annual allowance hike over two tax years.

2. For those of you who have your own company, you may wish to speak to your accountant about using your company for your next car!

3. Don’t be blinded by the initial attraction of low-cost motoring. After taking all aspects into account it’s typically not a true position. There can be substantial impacts on your tax position and your pension in retirement, which is the detail in the shadows.

Whatever you decide, you need to factor in the “true” cost when looking at the leasing scheme, as it’s not as straightforward as you may have initially thought. 

Car leasing is not for everyone. If you are considering using this option, I suggest you plan carefully. It is a serious commitment, and you should give due consideration. As always, we recommend you seek full advice from your adviser based on your circumstances before making any decision.

This article is not specific advice. We would always suggest that you get specialist advice in this area.

Has leasing your car through the NHS affected your pension? Let us know by leaving a comment below.