What Is An Electric Car Salary Sacrifice Scheme?
Switching to an electric car is a great way to reduce your carbon footprint and do your bit for the environment, but the high upfront cost often makes it feel out of reach. A study by The Electric Car Scheme found that 63% of Brits see cost as the biggest barrier to driving electric.
An EV salary sacrifice scheme solves this by making electric cars more affordable. Employees lease an EV through their employer and pay via pre-tax salary deductions, cutting costs significantly. Employers can offer this no-cost benefit in the workplace to help more people drive electric and move toward a sustainable future.
In this blog, we will be discussing how electric car salary sacrifice schemes work and how they can benefit employees and employers alike.
How Does EV Salary Sacrifice Work?
An electric car salary sacrifice scheme is a workplace employee benefit where a company leases an electric car for an employee, and the employee agrees to "sacrifice" a portion of their gross salary to cover the lease cost within their contract. Unlike standard car leases, payments are deducted from pre-tax income, reducing the employee’s taxable salary and maximising savings. This is a great way to incentivise electric ownership and make employees feel valued in their role - a win-win!
Tools like The Electric Car Scheme's quote calculator simplify the process. They allow employees to estimate costs based on their salary, lease terms, and mileage, providing a clear view of available options.
| Salary Sacrifice Calculations | Cost |
|---|---|
| Average Monthly Salary Sacrifice | £710 |
| Employee Income Tax Savings | -£284 |
| Employee National Insurance Savings | -£14 |
| Average Benefit-In-Kind Over Term | +£49 |
| Net Cost/You Pay | £461 |
The table below shows the savings for a 40% taxpayer choosing to salary sacrifice a Kia E-Niro - one of the most popular options from The Electric Car Scheme - based on a 10,000-mile annual lease with maintenance, tyres included, and a flat payment profile.
What is Benefit in Kind (BIK)?
Electric cars provided through The Electric Car Scheme fall under the 'company cars' category designated for personal use, making them subject to Benefit in Kind (BIK) tax. Currently, electric cars enjoy a favourable BIK rate of just 2%, valid until 2025, after which it will incrementally increase by 1% annually until 2028, when it will reach 5%. In 2028, BiK rates will increase by 2% year-on-year.
BIK tax is calculated based on the car’s list price (P11D value), CO2 emissions, fuel type, and the employee's tax rate. Higher list prices and emissions mean higher BIK tax.
BIK tax is treated as additional taxable income, calculated as a percentage of the car’s list price, which varies depending on emissions and fuel type. This amount is added to the employee's total taxable income, increasing their overall tax liability.
Here Are Some Important Things To Know About BiK And Electric Cars
HM Treasury establishes the BiK tax rate, and it's generally taken out of your salary through PAYE (pay-as-you-earn).
Selecting a zero-emissions plug-in vehicle (i.e., an electric car) instead of a traditional petrol or diesel car can lead to significant savings.
Currently, the BiK rates make electric cars and efficient plug-in hybrids attractive because the company car tax on electric vehicles is considerably lower.
How Does BiK Work At The Electric Car Scheme?
In The Electric Car Scheme’s case, the company benefit we provide is a brand new, heavily discounted electric car. From HMRC’s perspective, this is different or supplementary to your gross salary and so you have to pay BiK tax because you are receiving an additional benefit. This is calculated and added into your monthly lease payments, so you don’t need to worry about paying the tax, we’ve got it covered for you!
Is An EV Scheme Right For You?
Whether you’re an employer or an employee, it is important to understand if an electric car salary sacrifice scheme is the right fit for you and your company.
For The Employee
An EV salary sacrifice scheme can make driving an electric car more affordable by reducing income tax and National Insurance contributions. It’s especially beneficial for higher-rate taxpayers or anyone looking to lower their carbon footprint without the high upfront cost of an EV. It is the most cost-effective way of making the transition to a low-emission vehicle, whilst also making you feel valued within your workplace.
For The Employer
For employers, the scheme is a cost-free way to offer a valuable employee perk while enhancing sustainability credentials. It supports corporate net-zero goals and helps attract and retain eco-conscious talent. It’s a great way to promote green initiatives and is easy for your team to implement and manage.
What Does Company Car Tax Mean?
In the United Kingdom, company car tax, commonly referred to as benefit in kind (BIK) tax, is a tax liability that may be imposed on employees when they receive a company car from their employer for personal use. This tax is predicated on the principle that having a company car is regarded as a work-related benefit or perk, and as such, it carries a taxable value.
Understanding the National Minimum Wage And Its Relation To Salary Sacrifice
The National Minimum Wage (NMW), which represents the minimum hourly wage that most employees are legally entitled to in the UK, is a critical standard. It is obligatory for all employers, irrespective of the size of their business, to adhere to this mandate set by the UK government. The National Minimum Wage was increased in April 2024, with workers over 21 being entitled to the National Living Wage. You can see the NMW rates from 1st April 2024 in the table below:
| National Minimum Wage rate from 01/04/24 | Increase in pence | Percentage increase | |
|---|---|---|---|
| National Living Wage (21 and over) | £11.44 | £1.02 | 9.8% |
| 18-20 year old rate | £8.60 | £1.11 | 14.8% |
| 16-17 year old rate | £6.40 | £1.12 | 21.2% |
As you know, salary sacrifice is an agreement where an employee trades part of their salary for a non-cash company perk, such as an electric car in an EV scheme. How are they related? The salary sacrifice agreement cannot cause the employee to fall below the National Minimum Wage. Employers must ensure that even after participating in a salary sacrifice scheme, employees continue to receive at least the legally mandated minimum hourly wage.
What Do You Do If Your Pay Is Variable?
An employee receiving variable pay can participate in a salary sacrifice scheme but it cannot be used if the employee’s earnings fall below the National Minimum wage. This requirement is essential to ensure that, even after salary sacrifice deduction, their basic salary consistently remains above the threshold.
What Does The Term Marginal Tax Rate Mean?
In the UK, the marginal tax rate signifies the tax rate that applies to the highest portion of your earnings. The UK's tax system is progressive, which means that as your income rises, so does the tax rate you'll pay.
The Current Marginal Tax Rates In The UK:
Basic Rate: A 20% tax rate applies to income between the Personal Allowance (set at £12,570 for the tax year 2023/2024) and the basic rate limit (which stands at £50,270 for the tax year 2021/2022).
Higher Rate: If your income exceeds the basic rate limit (currently £50,271 for the tax year 2023/2024) but doesn't go beyond the additional rate threshold (set at £125,140 for the tax year 2023/2024), a 40% tax rate applies.
Additional Rate: For income surpassing the additional rate threshold (over £125,140 in the tax year 2023/2024), a 45% tax rate comes into play.
The marginal tax rate impacts salary sacrifice payments by reducing an employee’s taxable salary, which lowers income tax and National Insurance contributions. Higher-rate taxpayers benefit more, as their tax savings are greater, making salary sacrifice particularly advantageous for those in higher tax brackets.
How Are Employees Protected In An EV Salary Sacrifice Scheme?
EV salary sacrifice schemes can pose significant financial risks for employers, especially when leasing brand-new electric cars. For example, redundancies may result in fees of up to 50% of the remaining lease costs, deterring many businesses from offering such schemes. Research by The Electric Car Scheme found that 90% of businesses see these risks as a major concern.
To address this, The Electric Car Scheme introduced Complete Risk Protection, eliminating financial risks for employers if employees leave during the lease. This comprehensive package covers costs due to resignation, redundancies, long-term sickness, family leave, or car damage, without the complex terms or exclusions seen in other offerings. Both employers and employees are safeguarded, even if the car must be returned.
The table below outlines the coverage provided and reasons for return.
| Reason For Return | What's Protected? |
|---|---|
| Resignation | From 3 Months |
| Redundancy | Immediately |
| Dismissal | Immediately |
| Long Term Sickness | Immediately |
| Loss of Licence was (Medically ) | Immediately |
| Death | Immediately |
| Excess To Pay For Protection | None |
| Caps Or Limits Of Usage | None |
| If Employee Doesn't Pay For ET Fees Or Damage | Yes |
Why Choose The Electric Car Scheme As My EV Salary Sacrifice Provider?
At The Electric Car Scheme, we aim to make the switch to an electric car scheme as simple as possible. We offer market-leading risk protection, have access to the top leasing companies, used EV salary sacrifice and now offer The Charge Scheme - salary sacrifice on charging your car too!
Earlier this year, we expanded our offer to include used electric vehicles, which is now the most affordable way of getting into an EV! Whether you choose a used or new car, the process will be the same. The Electric Car Scheme will provide the same package, support and service to you and your company.
The table below compares the costs of a new Kia Niro EV 150kW 4 65kWh and used Kia Niro EV 150kW 4+ 64kWh based on the earlier example's terms. You would save £196 every month on the cost of your car, just by choosing a secondhand model on top of all other salary sacrifice savings.
| Salary Sacrifice Calculations | New | Used |
|---|---|---|
| Average Monthly Salary Sacrifice | £783 | £451 |
| Employee Income Tax Savings | - £313 | - £180 |
| Employee National Insurance Savings | - £15 | - £9 |
| Average Benefit-in-Kind Over Term | + £53 | + £49 |
| Net Cost/You Pay | £507 | £311 |
| Extra Savings Per Month With A Used Car | - £196 |
How Could Your Company Benefit From Offering An Electric Car Salary Sacrifice Scheme?
If you choose The Electric Car Scheme as your salary sacrifice provider, you will receive the best prices on electric cars, unrivalled protection and a trusted 5* service. There are many benefits you get by offering this as an employee benefit:
Complete risk protection - Companies and employees shouldn't worry about extra fees if their electric car needs to be returned early due to unforeseen circumstances. That's why unrivalled protection is included to give you and your team peace of mind.
No net cost to your business to run the scheme - Net zero choices should be affordable for all. With no setup or running costs, our fee is equivalent to your employer's tax savings, so you can roll out the scheme at no cost to your business.
Make your team feel rewarded inside the workplace - By offering this benefit you can support their journey to Net Zero and directly reduce your company’s carbon emissions. You can save your team 30-60% on the cost of their car through salary sacrifice.
Straightforward reporting - It’s easy to keep your HR, Finance and Tax affairs on track. Our automated monthly payroll, HMRC and climate reporting help you with compliance and minimise hassle.
Happy and healthier company - Employee happiness is at the heart of a healthy, thriving company. With The Electric Car Scheme, you can show your commitment to sustainability. Your employees will appreciate the opportunity to make a positive impact.
Frequently Asked Questions
How Do I Calculate How Much Benefit-in-Kind I Owe?
It is easy to calculate how much Benefit in Kind tax you owe by following the formula:
P11D value of the car ✕ the BIK rate ✕ your income tax bracket = BIK tax owed
Learn more about Benefit-in-Kind tax in our comprehensive guide which aims to answer frequently asked questions about the topic!
What Is A Salary Sacrifice Schedule?
A month-to-month breakdown of your financial commitment throughout your lease term is invaluable. A salary sacrifice schedule, in this context, refers to an arrangement where an employee willingly allocates a portion of their earnings to access non-cash benefits or privileges - such as the use of an electric car through salary sacrifice.
This schedule constitutes a formal agreement between the employer and employee, outlining the specific amount or percentage of the salary that will be sacrificed. It further details the corresponding benefits the employee will enjoy in exchange for their participation in the salary sacrifice program.
What Is The Electric Car Scheme’s Salary Sacrifice Calculator?
The Electric Car Scheme Salary Sacrifice Calculator is a powerful tool designed to help you explore the array of electric cars available and receive a personalized quote, revealing the incredible savings you can achieve through salary sacrifice.
All you have to do is provide your company name and some basic information for a tailored quote. Once you've completed a quote using the calculator, you can schedule a consultation with one of our Specialists to delve deeper into the details.
Does EV Salary Sacrifice Impact National Insurance?
National insurance contributions (NIC) represent a crucial tax obligation shared by both employers and employees, contributing to government benefit programs.
In the context of salary sacrifice, you're effectively trading a portion of your gross salary (your earnings before tax deductions) for non-cash benefits. This deliberate reduction of your gross salary before taxation carries a notable advantage – it results in savings on your national insurance contributions. By adopting a salary sacrifice arrangement, you can optimise your financial strategy and reduce your national insurance burden.
Learn more about The Electric Car Scheme and how salary sacrifice works by visiting our website!
Last updated: 23/12/2024
Our 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.
