Will EV Salary Sacrifice Affect My Pension?
Image sourced from Vuka
Salary sacrifice schemes provide companies with a cost-effective way to enhance employee benefits. While it is great for employees, they can raise questions about their effect on salary, pensions, and access to other benefits.
This article explains how EV salary sacrifice schemes might impact your pension, ensuring you're fully informed before taking advantage of your company's salary sacrifice scheme. We will also break down your salary sacrifice payments and how it works at The Electric Car Scheme.
How Do Salary Sacrifice Schemes Work?
Salary sacrifice schemes have become more popular in recent years. Employees choose to sacrifice a portion of their salary towards a beneficial item or service, such as childcare vouchers, pension contributions and even an electric car.
EV salary sacrifice schemes work similarly to the Cycle to Work Scheme, but differ from car allowances, in the sense that the employee sacrifices their pre-tax salary in exchange for an EV. This differs from traditional car leases, where payments come from net pay (post-tax income). This is a tax-efficient approach that allows employees to maximise their savings.
Companies choose to offer electric car salary sacrifice as a benefit to boost employee satisfaction and retention, or to advance ESG (environmental, social, governance) objectives. It is a great way to ensure your employees are happy at no cost to the company.
How Does Salary Sacrifice Affect Your Pension?
Salary sacrifice schemes provide a cost-effective way for companies to enhance employee benefits. However, they can influence pensions depending on the type you have. In the UK, there are two main types of pensions: defined contribution (DC) and defined benefit (DB). Defined contribution, the most common, is influenced by contributions you and your employer make, while defined benefit is based on your salary and years of service. This article will explain how salary sacrifice schemes can affect these pensions, help you calculate potential changes, and guide you on how to manage, adjust, or enrol in the right pension scheme for your needs.
What Does This Mean For Defined-Benefit Pensions?
Defined benefit (DB) pension schemes are funded by both employers and employees. They are still common in the public sector, like for teachers, but less so in the private sector.
In a DB pension scheme, the employer decides how much to contribute, taking responsibility for both investing the funds and paying out the benefits. Your pension amount is calculated based on two key factors:
The number of years you've been part of the scheme.
Your salary, typically your average or final salary at retirement.
For instance, if you’re part of the Teacher's Pension Scheme (TPS), your retirement income is based on your average career earnings. When you retire, you’ll receive a regular pension payment, which can either be:
Annuity payments: Monthly payments for life.
A lump-sum payment: A one-time withdrawal of the total pension value.
It’s important to note that if your salary sacrifice scheme, such as an EV (electric vehicle) salary sacrifice scheme, hasn’t been approved by the government, it can reduce your pension. Here's why:
Salary sacrifice reduces your taxable income,
For DB pensions, this lower salary is used to calculate your average earnings over your career,
As a result, your retirement pension may be smaller.
For example, as a teacher, if you participate in an EV salary sacrifice scheme that hasn’t been approved, the reduced salary could lower the average earnings used to calculate your pension, decreasing the amount you’ll receive in retirement.
What About Defined Contribution Pensions?
Defined contribution (DC) pension schemes are the most common type of pension plan today, primarily funded by employees. Companies may choose to match employee contributions up to a set limit, but they have no responsibility for managing or influencing the performance of the funds once deposited. DC schemes are appealing to employers because they are low-cost and require minimal management.
Employees are responsible for calculating their contributions, enrolling in the plan, and managing their chosen investments from the options provided. These investments grow tax-free until they are withdrawn during retirement.
When it comes to defined contribution pensions, salary sacrifice is unlikely to affect your pension benefits because the calculation of contributions is based on your salary before the salary sacrifice adjustment is applied.
Does It Affect Your State Pension?
Your entitlement to the State Pension is calculated based on your annual primary contributions throughout your working life. While everyone is eligible for a State Pension upon reaching retirement age, factors such as your age and any gaps in your National Insurance record - caused by periods of unemployment or earning a low wage - can influence the amount you receive.
A salary sacrifice scheme is unlikely to impact your State Pension entitlement. This is because you typically accrue enough qualifying years for the State Pension and exceed the Lower Earnings limit of £6,396. You would have needed to work very few hours a week whilst still complying with the National Minimum Wage threshold, which is unlikely.
What Happens To My Pension If I Change Jobs While In An EV Salary Sacrifice Scheme?
If you change jobs while participating in a salary sacrifice scheme, your pension contributions may be affected, as these contributions are typically calculated based on your reduced salary. When you leave your current employer, your pension contributions will stop unless your new employer offers a salary sacrifice scheme and continues to contribute to your pension. If they don’t, you may need to opt into the pension scheme with your new employer, and your pension contributions will be based on your full salary instead of the reduced salary under the salary sacrifice scheme.
If you change jobs whilst you still have the same EV salary sacrifice scheme, here’s what could happen depending on the scheme’s terms and your new employer’s policies.
Continue The Scheme With Your New Employer
If your new employer offers the same salary sacrifice scheme or is willing to set one up with the same provider, you should be able to transfer your arrangement over to your new employer. This would require your new employer’s agreement and support.
Early Termination Of Your EV Salary Sacrifice Scheme
If your current employer doesn’t offer EV salary sacrifice or offers it with a different provider, you may have to terminate the scheme early. This can involve fees, which may cover outstanding lease payments, administrative costs or an early termination penalty.
Personal Takeover Of The Lease
In some schemes, you may be given the option to take over the lease on a personal basis, which would include assuming responsibility for the lease outside of a salary sacrifice agreement.
Return The Vehicle
If there is no way to continue or take over the lease, then the vehicle will either need to be returned to the salary sacrifice provider or it will be marketed internally to other employers at your old company. Again, this may involve fees.
Is There A Minimum Salary Threshold To Maintain Pension Benefits While Using Salary Sacrifice?
If an employee's salary falls below the lower earnings limit of £6,396 per year, their entitlement to the State Pension may be affected. As a general rule, no salary sacrifice scheme should reduce an employee's take-home pay below the minimum wage.
Can I Opt Out Of Pension Contributions And Still Keep My Salary Sacrifice Car?
Yes, you can opt out of pension contributions and still keep your car because it will not affect your eligibility for salary sacrifice. Salary sacrifice generally will have little to no impact on your pension contributions unless you have a DB pension.
Do I Need To Inform My Pension Provider About My Salary Sacrifice Scheme?
Yes, you should. As an employee, you need to agree to the change in your contract or through an agreement letter. If you wish to opt out, inform your pension provider by submitting a completed form before the payroll deadline. If you’re an employer, contact your payroll or pension provider to ensure they can facilitate salary sacrifice schemes. You will also need to obtain employees' permission before enrolling them in a salary sacrifice scheme.
How Does HMRC View Pension Contributions Alongside Salary Sacrifice Agreements?
HMRC treats pension contributions alongside salary sacrifice arrangements in the UK with specific rules and guidelines that ensure both the pension contributions and the salary sacrifice are compliant with tax laws.
Salary Sacrifice for Pension Contributions: When an employee agrees to reduce their salary in exchange for a pension contribution (a salary sacrifice arrangement), the pension contribution is treated as a tax-free benefit for both the employer and employee. HMRC does not count the sacrificed amount as taxable income, so the employee effectively benefits from a reduced National Insurance (NI) and income tax bill.
Employee Benefits: The employee's taxable salary is reduced by the amount of the salary sacrifice. This means their income tax and National Insurance contributions will be lower.
Employer Benefits: Employers also save on National Insurance contributions because the sacrificed salary is not subject to employer NI.
Pension Contributions & Annual Allowance: The total pension contributions (including employer contributions) count towards the employee’s annual allowance for pensions. For most individuals, this annual allowance is £60,000 (as of 2024). Contributions exceeding this allowance may result in a tax charge. Both employer and employee contributions under salary sacrifice arrangements are counted toward the annual allowance.
Tax Relief: When the pension contribution is made through salary sacrifice, the employee benefits from tax relief immediately, as the contributions are deducted before tax. If the contributions are made through the employer, the employer may also apply for tax relief via payroll under the "relief at source" method, meaning the contributions are made from the employee’s gross salary.
Impact on Other Benefits: Salary sacrifice arrangements can sometimes impact other benefits linked to an employee’s salary, such as statutory maternity or paternity pay, as these are often calculated based on the reduced salary after the sacrifice. However, pension contributions themselves are generally not affected by these calculations.
Overall, HMRC expects employers and employees to handle salary sacrifice arrangements in a transparent and compliant way.
How Much Can I Save On The Cost Of A Car With A Salary Sacrifice Scheme?
At The Electric Car Scheme, employees can save 20-50% on the cost of an electric car because of the tax savings available. Here are two examples of the monthly pricing breakdown for two of the most popular cars to lease from The Electric Car Scheme: the MG4 and the Tesla Model Y. The pricing is calculated using our quote tool and is based on someone earning £70,000 per annum who has opted for a three year lease, flat payment profile and intends to travel 10,000 miles a year.
| Tesla Model Y Long Range | Cost Breakdown |
|---|---|
| Monthly Gross Cost | £712 |
| Income Tax Saving | - £285 |
| National Insurance Savings | - £14 |
| Benefit-in-Kind Tax | + £65 |
| Net Cost/You Pay | £477 |
As you can see, without a salary sacrifice scheme in place, you would be paying £712 per month to lease a Tesla Model Y. However, with The Electric Car Scheme, you will save £285 on income tax every month and £14 on National Insurance! You will have to pay a small amount of Benefit-in-Kind tax every month - which is otherwise known as company car tax. This will bring the cost down to £477, saving you £235 monthly.
If you’re looking for a more affordable EV to salary sacrifice, you may be interested in an MG4. With The Electric Car Scheme, you could be saving £193 in Income Tax and £10 in National Insurance contributions every month. By making the most of your companies EV salary sacrifice scheme, you could bring the lease cost down from £482 to £316 every month!
| MG4 150kW SE Long Range | Cost Breakdown |
|---|---|
| Monthly Gross Cost | £482 |
| Income Tax Savings | - £193 |
| National Insurance Savings | - £10 |
| Benefit-in-Kind Tax | + £37 |
| Net Cost/You Pay | £316 |
You can learn more about The Electric Car Scheme by visiting our website or you can see the electric cars available by experimenting with our quote tool!
Last updated: 16.12.24
Our lease pricing is based on data collected from The Electric Car Scheme quote tool. All final pricing is inclusive of VAT. All prices above are based on the following lease terms; 10,000 miles pa, 36 months, and are inclusive of Maintenance and Breakdown Cover. The Electric Car Scheme’s terms and conditions apply. All deals are subject to credit approval and availability. All deals are subject to excess mileage and damage charges. Prices are calculated based on the following tax saving assumptions; England & Wales, 40% tax rate. The above prices were calculated using a flat payment profile. The Electric Car Scheme Limited provides services for the administration of your salary sacrifice employee benefits. The Electric Car Scheme Holdings Limited is a member of the BVRLA (10608), is authorised and regulated by the FCA under FRN 968270, is an Appointed Representative of Marshall Management Services Ltd under FRN 667174, and is a credit broker and not a lender or insurance provider.
