The salary sacrifice scheme for electric cars is a benefit that some employers offer their staff so they can use an electric car as a company benefit and reduce their tax bill at the same time.
HMRC allows employers to lease a car from a lease car provider and present the EV salary sacrifice scheme which is sometimes called salary exchange to their staff as a benefit.
In theory the electric car scheme can help you save tax by lowering your salary and through taking advantage of the low company car tax rates given to electric cars.
Employees fund the electric company car using a portion of their pre tax salary, resulting in savings on national insurance contributions and income tax.
Electric vehicles offered through the electric car scheme are classified by the tax office as ‘company cars’ for personal use, which means they are subject to benefit in kind (BIK) tax.
The BIK tax liability of a company car can increase with higher list prices and CO2 emissions.
Electric cars enjoy a favourable BIK rate of only 2%, valid until 2025. After that, the BIK rate is expected to gradually increase by 1% each tax year until 2028.
As with any method of financing a new vehicle, there isn’t a universal solution with the best option for you hinging on your personal financial circumstances and driving needs.
Comparing an electric car salary sacrifice scheme with other more traditional ways of funding a car is worth doing with industry estimates reporting a saving of between 30% and 60% when comparing to personal leasing offers.
Michel Potter, Founder and CEO of DriveElectric said:
“In the next few years, businesses will be increasingly driven to prioritise sustainability, and EV Salary Sacrifice schemes will emerge as one of the most effective tools for both employers and employees.
These schemes offer significant financial benefits, such as reduced national insurance contributions and lower income tax, that is why we have explored this topic in more detail in a recent piece about the EV salary sacrifice scheme.
At DriveElectric, we’ve been pioneers in the electric vehicle market, and now we’re helping our customers enable their employees to make the switch to EVs as affordably as possible. We strongly believe that employers should embrace these schemes to attract new talent and support their workforce in the transition to electric vehicles.”
Understanding salary sacrifice and electric car leasing
A salary sacrifice car is leased from a third party provider partnered with your employer. As an employee, you can give up a set amount of your monthly salary in exchange for a new electric car.
The car’s cost is taken from your salary each month before tax is deducted meaning you save on income tax and national insurance (NI) contributions.
There’s no specific limit on the amount you can sacrifice but your reduced salary must remain above the national minimum wage (NMW).
Once you agree to a car salary sacrifice scheme, you’re committed for the contract duration, unless you leave your job, in which case you’ll need to return the car.
Not all employers offer an electric car salary sacrifice scheme and they are under no obligation to make one available.
If your employer is unaware of the benefits of the electric car salary sacrifice scheme it could be worth mentioning it to the relevant department so they can review the advantages for both an employer and it’s employees.
Electric car salary sacrifice and company car tax
It’s crucial to note that a salary sacrifice car is still subject to company car tax, known as a benefit in kind (BIK).
Company car tax is charged monthly based on the car’s value, its CO2 emissions and your tax bracket.
BIK tax represents an additional taxable income for employees, which is subject to income tax.
Calculating BIK tax involves considering several factors, such as the car’s list price (referred to as the P11D value), its CO2 emissions, fuel type, and the individual’s personal tax rate.
Typically, it is a percentage of the car’s list price, with different percentages based on CO2 emissions and fuel type.
The company car benefit is then added to the employee’s total taxable income which will normally increase their overall tax liability.
To encourage fully electric cars the government have made the BIK rates low so workers using salary sacrifice schemes can benefit from minimal company car tax charges.
You can use the governments online calculator to work out the BIK tax of your company car benefit.
VED road tax is also a lot lower for electric cars which is as an added bonus.
Salary sacrifice electric car and higher rate taxpayers
By reducing your salary you will automatically pay less income tax and national insurance.
If you are a higher rate taxpayer reducing your salary could move your income from the 40% income tax bracket to the 20% basic rate.
This wouldn’t normally be the main reason why you would choose to get an electric company car but by sacrificing enough wages to get your income below the higher rate threshold will mean you will only pay tax at 20% instead of the 40% higher rate.
Salary sacrifice company car P11D
Salary sacrifice cars are considered company cars, meaning you’ll need to pay BIK tax which is reported to HMRC on a tax form called a P11D.
Most employers will give you a P11D after the end of each tax year which will state the value of your company car benefit.
When you receive it you should check the company car figure entered on your P11D for accuracy.
If you complete a self assessment tax return you should include your company car benefit in kind figure(s) from your P11D in the employment section of your return.
- To determine the company car tax, multiply the vehicle’s P11D value by the BIK percentage band.
- Next, take that amount and multiply it by your tax rate (20%, 40% or 45%).
- Divide this total by 12 to find your monthly benefit-in-kind payment.
Does a salary sacrifice car benefit affect my tax code?
All employees paid through PAYE will have a tax code which will have to include the value of a salary sacrifice electric car benefit in kind.
When your salary sacrifice company car benefit begins it’s best to check that your tax code updates with the correct BIK value and if it doesn’t you should contact HMRC directly so they can make any necessary revisions.
If your company benefit ever changes or you stop receiving it you should again assess your tax code so you can avoid incorrect tax deductions.
Additional perks of the electric car salary sacrifice scheme
Beyond reduced income tax and class one NI contributions, you might benefit from substantial fleet discounts through your employer, potential VAT savings and no credit checks for the purchase.
You won’t need to provide a deposit and will usually enjoy a fully maintained and insured new vehicle for the lease duration.
The electric car salary sacrifice scheme is often comprehensive, typically covering all servicing and maintenance costs, unlimited tyre replacements and repairs.
There are also downsides to keep in mind. Due to your salary sacrifice, your net income will decrease, potentially impacting the sum you can borrow for a residential mortgage or other types pf personal loans.
Importantly it may also influence your pension plan and some workplace and statutory benefits because they may be calculated based on your reduced salary.
