Electric car salary sacrifice scheme explained

May 26, 2022 by

Salary sacrifice schemes can offer a great route into affordable EV motoring – but how do they work?

Electric car salary sacrifice schemes can be a tax-efficient way to get yourself an EV. They work by taking a portion of your earnings before tax, and using this to fund repayments on an electric car.

The principles of salary sacrifice apply to many goods and services, including childcare vouchers, bicycles, pensions and training courses – and also electric cars.

If you’re interested in an EV and your employer offers a salary sacrifice scheme for them, opting for this means you won’t have to pay tax on the money used to obtain the car, unlike a conventional private purchase, which would see you fund the vehicle out of your own cashflow, after all taxes and other deductions have been taken.

Electric car salary sacrifice schemes are relatively easy to implement, but the details of how such schemes work can be quite involved, so this article will talk you through the ins and outs of what’s required, and what the implications of the scheme are.

How does the electric car salary sacrifice scheme work?

Salary sacrifice, sometimes shortened to ‘salsac’, will see you sign a contract with your employer for a specified portion of your pre-tax earnings to be used for specific goods or services.

In the case of an electric car salary sacrifice scheme, you will choose a car from a list of vehicles approved by your employer based on how well the vehicle suits your needs and budget, then each month a portion of your salary will be automatically deducted, prior to tax, and this will cover the monthly repayment on the car.

The car will be leased from a third party firm by your employer, who in turn leases it to you under the scheme. Servicing and insurance will typically be included as part of the scheme, leaving you to just pay for electricity. Schemes tend to last from two to four years, and the cars can be for private or business use.

Do note that salary sacrifice schemes electric car schemes are different from company car schemes; the latter provides you with a car with no lease cost, though you will pay Benefit-in-Kind take on a company car.

Electric car salary sacrifice Benefit-in-Kind

An electric car obtained under the salary sacrifice scheme will be deemed a benefit in kind, and thus Benefit-in-Kind (BiK) tax applies.

The good news, though, is that because BiK taxes for cars are based on carbon dioxide emissions, and EVs don’t emit any CO2 at the tailpipe, the BiK tax implications will be minimal, and far outweighed by the positive effect of being able to obtain a car with your pre-tax earnings.

BiK rates for electric cars are frozen at 2% until at least 2025. Compare this to a petrol car emitting 130g/km of CO2 (a typical amount), which has a BiK rate of 31%, and you can see the advantages an EV brings here.

Cars can emit no more than 75g/km of CO2 in order to benefit from key salary sacrifice advantages, and while most plug-in hybrid cars come in under this threshold, they attract higher BiK rates than pure EVs, meaning they are often not as advantageous an option. As an example, a PHEV with CO2 emissions of 50g/km or less and a pure electric range of 40-69 miles will attract a BiK rate of 8%.

What are the benefits of the electric car salary sacrifice scheme?

The electric car salary sacrifice scheme is a win-win programme both for employers and employees.

Benefits for the employee

As outlined above, using salary sacrifice to obtain an EV can save you a significant amount of money, as you won’t pay tax on the earnings that fund the car, and BiK rates for EVs are attractively low.

Benefits for the employer

As an employer, offering a salary sacrifice scheme for electric cars can make your firm more attractive to potential employees. You can also make savings in employee National Insurance Contributions, and reduce your company’s carbon footprint.

Electric car salary sacrifice example

Let’s say your company offers a salary sacrifice scheme for electric cars, and the Tesla Model 3, and the lease deal on this is £550 a month, that is the amount that is taken out of your gross salary. If you were a 40% rate taxpayer, you would pay £220 on that £550 were you not using it for a salary sacrifice scheme, meaning your net outgoings for the Model 3 are equivalent to £310. You would make further savings as you won’t be paying National Insurance on that £550, either.

You will have to pay Benefit-in-Kind tax, but this is negligible for EVs. An entry-level Tesla Model 3 costs £45,990, and its 0g/km CO2 emissions gets it a BiK rate of 2%, so the taxman sees £919.80 of its value as taxable. If you’re a 40% rate taxpayer you will pay 40% of that in a year, equivalent to £367.92, or £30.66 a month – far less than the £220 of tac you’re not paying on that £550 monthly lease.

Who offers the salary sacrifice scheme?

Companies are under no obligation to offer salary sacrifice schemes to their employees, but those that do will often highlight this when advertising positions. Employers won’t facilitate these schemes themselves; rather, they will use a dedicated salary sacrifice company that will provide the car, the leasing terms, plus insurance and servicing programmes.

EV salary sacrifice FAQs

Can anyone get an electric car on the salary sacrifice scheme?

You can only use a salary sacrifice scheme if your employer offers one. You will need to be over 18, and have a fairly clean driving licence as insurance (which tends to be included with schemes) may be tricky to come by if you have several endorsements.

Which electric cars qualify for the salary sacrifice scheme?

In theory, any EV is eligible for a salary sacrifice scheme, but the choice of vehicles available to you will be determined by the cars offered by your employer via their programme.

Can you buy a used electric car on the salary sacrifice scheme?

An electric car salary sacrifice scheme is a method of leasing an EV. By default you will to give the car back at the end of the lease period, but you may also have the option to purchase it for an agreed price based on its market value.