Save Money On National Insurance: A Guide To Salary Sacrifice Schemes
Salary sacrifice allows employees to give up a portion of their gross salary in exchange for non-cash benefits, such as pensions, childcare vouchers, or company cars. This allows employers to provide benefits in a more tax-efficient manner, as the salary reduction typically lowers the employees’ taxable income, which can result in lower National Insurance contributions and income tax.
Over recent years, salary sacrifice has become popular among employers and employees. For employers, it can reduce their National Insurance liabilities, while employees benefit from the ability to access valuable perks at a reduced cost.
Additionally, with a growing emphasis on employee well-being, tax-efficient benefits such as pensions, electric vehicles, and health insurance are becoming increasingly attractive. With the electric vehicle market booming in recent years, an EV salary sacrifice scheme is one of the most attractive benefits available - as it can be run at zero net cost to the employer, with little administrative overhead. For the employee, the benefits include lower monthly payments on a new car and the associated savings on income tax - since the lease cost is deducted from their pre-tax salary.
As businesses continue to look for ways to engage and retain top talent, salary sacrifice schemes - such as The Electric Car Scheme - offer a flexible, cost-effective solution that is expected to expand even further in the coming years.
Understanding National Insurance Savings through Salary Sacrifice Schemes
Both employees and employers are required to make NI contributions based on the employee's earnings. In salary sacrifice schemes, employees forgo part of their gross salary in exchange for non-cash benefits, such as electric vehicles (EVs), and this has the added benefit of reducing both parties' National Insurance liabilities.
Current National Insurance Rates for Employers and Employees
As of the 2024 - 2025 tax year, the National Insurance rates for employees and employers (covered under Class 1) are as follows:
Employee Contributions:
Employees pay 12% on earnings between the Lower Earnings Limit (£12,570) and the Upper Earnings Limit (£50,270).
For earnings above £50,270, the rate reduces to 2%.
Employer Contributions:
Employers pay 13.8% on earnings above the Secondary Threshold (£9,100) - this is rising to 15% in April.
These rates apply to salaries above the respective thresholds, meaning both employees and employers pay NI contributions.
How Salary Sacrifice Can Reduce NI Contributions
Salary sacrifice reduces the gross salary that is used to make employer and employee NI contribution calculations. By opting into a salary sacrifice scheme - such as an electric car scheme - the employee's taxable income is lowered, leading to a reduced NI bill for both employers and employees.
This can be applied across a wide range of benefits, including add-ons to the original car salary sacrifice scheme such as home charger installations, salary sacrificed charging, and car insurance.
A Salary Sacrifice Car Scheme in Practice
An Example for an Employee Earning £40,000 Gross p/a
| Employers NI Liability | Without Salary Sacrifice | With Salary Sacrifice |
|---|---|---|
| Total Salary | £40,000 | £35,000 |
| Taxable Income | £30,900 | £25,900 |
| Employer NI contributions | £4,267.20 | £3,582.20 |
Salary Sacrifice leads to £685 in employer NI savings.
| undefined | Without Salary Sacrifice | With Salary Sacrifice |
|---|---|---|
| Total Salary | £40,000 | £35,000 |
| Taxable Income | £27,430 | £22,430 |
| Employer NI contributions | £3,291.6 | £2,691.60 |
The employee will save £600 in NI as a result of salary sacrifice.
Typical Savings at Different Salary Levels
In this example, the employee sacrifices £5,000 of their salary for an electric vehicle lease.
| undefined | Salary Sacrificed | Salary After Sacrifice | Employee NI Savings | Employer NI Savings |
|---|---|---|---|---|
| £30,000 | £5,000 | £25,000 | £400 | £700 |
| £40,000 | £5,000 | £35,000 | £600 | £685 |
| £50,000 | £5,000 | £45,000 | £800 | £950 |
| £60,000 | £5,000 | £55,000 | £1,000 | £1,250 |
The table highlights how both employees and employers can benefit from reduced National Insurance contributions. The higher the salary, the greater the potential savings.
Working out EV Salary Sacrifice savings for the whole company.
To calculate company-wide savings from an electric vehicle (EV) salary sacrifice scheme, businesses need to assess the total savings in National Insurance contributions and the potential for other benefits like increased employee engagement and retention. Here's how you can estimate the financial impact:
Determine the Number of Employees Participating: Start by estimating how many employees are likely to opt into the EV salary sacrifice scheme.
Estimate the Average Salary Sacrifice: Next, work out the average amount that employees would sacrifice from their gross salary for the EV lease. For example, if the average salary sacrifice is £5,000 per employee, and 100 employees participate, that’s a £500,000 collective sacrifice.
Calculate Employer NI Savings: Multiply the employer's National Insurance savings by the number of participants. If your company saves £685 annually per employee, with 100 employees opting in, the total savings would amount to £68,500. You can repeat this process for employee savings too!
Total Company Savings: Combine the employee and employer savings. For 100 employees sacrificing a total of £500,000, you could see employees saving a collective £60,000, and the company saving a total of £68,500 for a grand sum of £128,500 saved annually.
This calculation gives a clear overview of the direct financial benefits that the company can expect to see in terms of reduced National Insurance contributions.
Additional Benefits Beyond National Insurance Savings
While the National Insurance savings are a compelling reason to implement an EV salary sacrifice scheme, there are several other key benefits that companies should consider:
Employee Retention & Attraction
Offering an attractive salary sacrifice scheme - such as The Electric Car Scheme - can significantly enhance employee satisfaction and retention. The flexibility and financial benefits of EV schemes can improve employee morale, while the ability to access a new vehicle at a reduced cost is a powerful perk. It can also help companies stand out when competing for top talent, whilst reducing turnover and saving on recruitment costs in the long run.
Corporate Social Responsibility (CSR) & ESG Goals
EV salary sacrifice schemes can support the company's ESG goals, particularly in terms of sustainability and reducing carbon footprints. By offering EVs as part of employee benefits, companies contribute to reducing their climate impact by promoting greener transportation options. This can enhance a company’s image and demonstrate a commitment to environmental responsibility. Futureproofing is increasingly important to customers, investors, and employees.
Tax Efficiency for Employees
Salary sacrifice schemes make EVs more affordable for employees because they reduce their taxable salary. As a result, they may pay less in income tax and National Insurance contributions, which increases the overall value of the benefit. In addition, for those who would not have purchased an electric vehicle otherwise - a salary sacrifice scheme is a great way to reduce the cost of owning an EV, which is at present a barrier to entry for many.
Cost-Neutral Implementation Possibilities
While implementing an EV salary sacrifice scheme offers significant benefits, companies may wonder about the costs involved in setting up and maintaining a scheme. Here are a few ways to make the implementation cost-neutral:
Partnering with a Scheme Provider
To reduce administrative and operational costs, companies can partner with a scheme provider - like The Electric Car Scheme - specialising in EV salary sacrifice schemes. These providers often have the infrastructure and experience to manage the scheme, including vehicle sourcing, paperwork, and compliance with tax regulations. The best salary sacrifice car schemes are offered at no net cost basis to the company.
Tax Efficiency for the Company
Companies may be eligible for tax breaks or government incentives for offering green transportation options to their employees, particularly if the scheme is part of a broader sustainability initiative. EV salary sacrifice schemes may also allow companies to claim back VAT as part of the process - contributing to a zero net cost scheme.
Increased Employee Productivity
While more intangible, offering employees benefits like an EV salary sacrifice scheme could lead to higher job satisfaction, increased productivity, and better performance. Happier employees tend to be more engaged, leading to potential long-term profitability for the company. Over time, the cost of implementing the scheme may be offset by improvements in employee performance and retention.
Benefits for Employees
A salary sacrifice car scheme will allow employees to save on NI contributions and income tax by sacrificing some of their gross salary for a company car, which reduces the taxable income. Employees who use the scheme can also salary sacrifice maintenance, repairs, servicing, insurance and even a home charger.
Employees can benefit from a salary sacrifice car scheme in several ways:
Cheaper Lease Prices
Employees can get a new EV without the need to buy one outright or commit to an expensive lease. Salary sacrifice makes it more affordable by using the employee's pre-tax salary to achieve lease savings of 20-50%.
Reduced Income Tax and NI
Salary sacrifice schemes reduce taxable income. By sacrificing a portion of their salary to access a benefit like an EV, employees lower their income tax and National Insurance contributions. This can result in substantial savings, especially for higher earners.
Lower Running Costs
EVs often have lower running costs compared to traditional petrol or diesel cars. These include savings on fuel and maintenance. Plus, some schemes offer fully comprehensive vehicle insurance, maintenance, and servicing as part of the scheme - bringing the costs down further.
Employee NI Savings Explained
Before Salary Sacrifice: Normally, employees pay 12% of their income between the Lower Earnings Limit (£12,570) and the Upper Earnings Limit (£50,270) in National Insurance contributions, and 2% on earnings above this threshold.
After Salary Sacrifice: When an employee participates in an EV salary sacrifice scheme, they agree to reduce their gross salary by a certain amount (the cost of the EV lease). This reduces their taxable income, which lowers the National Insurance contributions.
For example, if an employee's salary is £40,000 and they sacrifice £5,000 p/a to lease an EV, their taxable salary is reduced to £35,000, lowering their NI contributions. This results in both direct and indirect financial benefits, such as increased take-home pay.
The impact on take-home pay depends on the level of salary sacrifice, as well as the employee’s tax bracket. It is worth noting that employees paying Higher or Additional income tax rates will save more money on their electric car salary sacrifice.
Let’s compare the total tax costs for a £40,000 earner, leasing an EV for £5,000 a year.
| Without Salary Sacrifice | With Salary Sacrifice | |
|---|---|---|
| Taxable Salary | £40,000 | £35,000 |
| Employee NI contributions | £3,291.60 | £2,691.60 |
| Income Tax | £3,486.80 | £2,743.80 |
| Total Tax: | £6,778.40 | £5,435.40 |
Setting up a Salary Sacrifice Car Scheme
The quickest, easiest, and most cost-effective way to set up a salary sacrifice car scheme is to go with a trusted provider such as The Electric Car Scheme. There is no net cost to your company and our specialists aim to make onboarding straightforward so that your business can start benefitting from EV salary sacrifice as soon as possible.
Step 1: Talk to us
Talk with one of our Product Specialists to understand how EV salary sacrifice will work in your business, and what we can do to help you get started.
Step 2: Sign up to The Electric Car Scheme
Our Product Specialists will handle the scheme setup and launch, ensuring a hassle-free process for you. We will liaise with your company to ensure a smooth launch.
Step 3: Launch the scheme
We’ll assign a dedicated Customer Success Manager to support your business with the launch of the scheme - this includes employee webinars, demo days, promotions and more.
Step 4: Ongoing support
Once your scheme is launched our EV Specialist and Customer Success Teams will regularly be in touch to ensure your scheme is an ongoing success. Your employees will then be able to lease their cars through The Electric Car Scheme.
Things to Consider
Company Credit Checks
Most schemes require employers to pass a credit check to ensure they are financially stable enough to cover lease costs since they pay the lease before recovering it from the employee's salary. Some companies may need to provide additional information to demonstrate their financial health - but this is rare.
Contracts and HMRC Forms
The company should have processes in place to update employee contracts and to report tax and NI changes through P11D forms. At The Electric Car Scheme, we provide detailed guidance for HR and Payroll departments to manage the implementation of the scheme.
Employer Risk Protection
According to our poll, around 92% of HR professionals assume that there is some risk to the company when it takes on a salary sacrifice scheme. Managing financial risk is critical - especially in cases of redundancy or resignation. The Electric Car Scheme offers Complete Employer Protection from day 1 - meaning that your company will be covered should the worst occur. Other providers will differ in their offerings, and it is worth assessing any exclusions, time limits, or usage limits to their offerings.
Employee Communications
Make sure employees understand the scheme and its implications. Our EV Specialist and Customer Success Teams will regularly be in touch to ensure your scheme is an ongoing success, but we strongly recommend assigning a scheme coordinator from within your business to manage employee communications and reach out to us if necessary.
Use multiple channels to educate employees, such as email, internal sessions on benefits, and webinars. The Electric Car Scheme also provides resources to help employees learn more about the scheme.
Salary sacrifice schemes, particularly those offering electric vehicles, provide a cost-effective way for both employers and employees to save on National Insurance contributions while supporting sustainability goals.
By reducing taxable income, both parties can significantly lower their NI liabilities, making this an attractive benefit for businesses aiming to enhance employee satisfaction, retention, and productivity.
Whether you're a business looking to attract top talent or an employee seeking a more affordable way to access a new EV, the advantages are clear. By partnering with a trusted provider - such as The Electric Car Scheme - companies can implement EV salary sacrifice smoothly and effectively.
Are you interested in offering The Electric Car Scheme at your company? Schedule a call with our team!
Last updated: 18.02.25
