Salary Sacrifice Scheme and the Electric Car

salary sacrifice and electric car

Salary sacrifice has been around for a while now. But in recent times it has become a popular topic again.  For two reasons, first employers want to offer a competitive package to help with staff retention. Second, money is tight for everyone, and a salary sacrifice scheme offers tax savings.  Tax savings for both the employer and the employee. So why not think about salary sacrifice?

So, what is a salary sacrifice scheme? It’s an arrangement between an employer and an employee.  The employee agrees to a reduction in salary in return for a benefit.

The “benefits” are prescribed and limited.  So, for example, you can’t “sacrifice” X amount of your employee’s wages each month to pay for your employee’s summer holidays. Shame! But on the other hand, you can help your staff pay for an electric car.

Why are employers interested in Electric Cars and Salary Sacrifice

The global effort towards sustainability has resulted in an increasing demand for low-emission vehicles, such as electric vehicles (EV).

But despite the ever-growing popularity of the EV, according to a recent survey conducted by Autotrader 56% of drivers feel that the current cost is too high.  This makes many of us think it is not affordable for the average driver.

But what if there was a way where you as an employer could make it possible?  Why and how?

Cars owned by employees and driven for business purposes or commuting are counted as part of the company’s carbon footprint, which can account for between 65% and 95% of most companies’ carbon footprint.

All employers will have a sustainability target to meet in a few years and the car their employees drive will soon become relevant to them.

Of course, that day is far away but the electric car revolution has already started.

The UK has already pledged to achieve a “net zero” policy by the year 2050. As part of the program, the sale of petrol and diesel cars will be banned by the year 2035. Companies will slowly be looking at transitioning to EVs and one route is the salary sacrifice scheme.

How can we encourage more people to adopt electric vehicles?

One option is to provide incentives through salary sacrifice programs.

The company car which fell out of fashion a few years back is now making a comeback. This is due to the electric car.  The tax regime attached to the EV is much cheaper compared to other cars.

Here are the tax benefits of an electric company car. But what if you don’t qualify for a company car?

For those who do not qualify for a company car, access to a brand-new vehicle is still possible.  This is via the scheme called the Electric Car Scheme.

It works a bit like cycle to work scheme but for an EV.

The employer has to offer the scheme, but this is not complicated to set up. Next, the employer will lease the car from a third party. The monthly cost will cover all the running costs like service and insurance.

Just like any other method of car leasing, the employee will have an option to buy at the end of the lease period.  Or they could simply return the vehicle.

These schemes are becoming increasingly popular as they offer a cost-effective way to enhance employee engagement, retention, and talent attraction.  It is a tool in the overall perks you offer your staff.

Tax advantages of salary sacrifice schemes

When monthly payments are deducted from an employee’s salary pre-tax, the income tax and associated National Insurance contributions are lowered.  Hence creating a tax saving.

But the employee will be caught by the benefit-in-kind rules.  These are cheaper for the EV.

The benefit-in-kind (BIK) tax:

  • For EVs is currently just 2% until April 2025.
  • After April 2025, it will rise by 1% each year until April 2028.

If we compare this to petrol/diesel vehicles, where the BIK tax could be more than 30% by 2028, the savings are very clear.

Employers can save money on :

  • Class 1A NI contributions which is the tax paid when completing form P11d for car benefit.
  • Lease payments are deductible for corporation tax

Boost your sustainability journey

The benefits of salary sacrifice for both employers and employees are apparent. For many, it is a win-win situation as it offers tax advantages and opens up the opportunity to own an electric car, which otherwise might be considered too expensive.

It will also help your business towards cutting back on your carbon emissions.

But is it always the right option?

Should you offer Salary Sacrifice for the Electric Car?

It’s important to appreciate that salary sacrifice may not be the right answer for every employee.

Employees on lower incomes may not be eligible for salary sacrifice if it pushes their salary below the minimum wage (pre-tax).

Furthermore, salary sacrifice can affect government benefits because it impacts take-home pay, which is the basis for eligibility criteria for statutory maternity pay and working tax credits.

We know that the scheme offers tax benefits for those who want to explore the world of Electric Cars. But we also know that is not the right solution for everyone.  It is an option you should consider when thinking about providing benefits to your employees.

If you are interested in offering this option to your team we can help you.

Speak to us first and let’s crunch some numbers.  Call your normal manager.  However, if you are not working with us yet, here’s how we work