How Salary Sacrifice Works With Variable Pay
The high upfront cost of electric vehicles remains a significant barrier for many people looking to make the switch. Salary sacrifice schemes offer an accessible solution, allowing employees to lease an electric car through their employer while making payments from their pre-tax salary. Through The Electric Car Scheme, employees can save between 30-60% on any electric car, with both employers and employees protected if the car needs to be returned early through Complete Risk Protection. But how does this work for employees with variable pay?
To be eligible for an EV salary sacrifice scheme, your salary cannot drop below the National Minimum Wage with the scheme in place. This blog answers all of your questions about how electric car salary sacrifice works if your pay is variable!
Key Insights:
Employees with variable pay can participate in EV salary sacrifice schemes, provided their base salary remains above the National Minimum Wage,
As of April 2025, the National Minimum Wage will be £12.21 for those aged 21 and over,
Monthly income variations affect tax savings differently - National Insurance is assessed monthly while Income Tax is calculated on total yearly earnings,
It's recommended to maintain a buffer above minimum wage when considering salary sacrifice payments.
What Is Salary Sacrifice?
Salary sacrifice involves an agreement between an employee and employer where the employee directs a portion of their salary toward a specific benefit. This tax-free arrangement reduces both income tax and national insurance contributions. Salary sacrifice is a form of employee compensation arrangement that provides flexibility in how you receive your pay and benefits. This payroll policy allows you to exchange part of your salary for non-cash benefits, his tax-free arrangement reduces both income tax and national insurance contributions.
Common uses include pension contributions, healthcare benefits, and other workplace incentives that can enhance your overall compensation package. However, it is very important to ensure that it doesn't bring an employee's cash earnings below the National Minimum Wage (NMW) because it is against the law for employers to pay less than the NMW.
Opting for a salary sacrifice scheme means willingly forgoing part of your salary, resulting in a reduced income. The advantage lies in the diminished tax and insurance payments, meaning more money can be allocated towards personally beneficial expenses, like an electric car! It is a win-win.
Can Employees on Variable Pay Use a Salary Sacrifice Scheme?
Yes, an employee receiving variable pay can participate in a salary sacrifice scheme provided as an employee benefit. Companies need flexibility in their policies to manage these different scenarios effectively. The payroll team must implement proper procedures to handle various compensation structures.
It is very important to note that such a scheme cannot be used if it would bring the employee's earnings below the National Minimum Wage, as mentioned previously. This requirement is essential to ensure that, even after the salary sacrifice deduction, their basic salary consistently remains above the threshold. Failing this, there is a risk of falling below National Minimum Wage particularly in months without additional pay.
The table below shows the National Minimum Wage from April 2025.
| 21 and over | 18 to 20 | Under 18 | Apprentice | |
|---|---|---|---|---|
| Current Rate (as of April 2025) | £12.21 | £10 | £7.55 | £7.55 |
How does Variable Pay and Salary Sacrifice Work?
The situation becomes more complicated for employees whose income fluctuates significantly from month to month, as this can affect which tax bracket they fall into. Although both Income Tax and National Insurance contributions are based on annual earnings, they are calculated differently.
National Insurance is assessed monthly, meaning employees pay according to their earnings for that particular month.
Income Tax is calculated based on total earnings so far within the tax year, reflecting the tax band that would apply if their income continued at that rate for the rest of the year.
The situation becomes more complicated for employees whose income fluctuates. Companies need clear payroll policies to manage these arrangements effectively, especially when handling variable compensation structures. The amount of Income Tax and National Insurance an employee pays on variable income, such as commission, will change from month to month. An employee might be taxed at the basic rate in one month and at a higher rate in the next. If variable income is received later in the year, the employee might qualify for an Income Tax rebate for any overpayments made based on their total earnings up to that point.
When employees receive a bonus, they will pay more Income Tax and National Insurance in the month that the bonus is received. Over the year, their Income Tax will adjust to the correct level, while their National Insurance contributions should return to normal in the following month. Although employees will save the same amount of Income Tax on the salary sacrifice over the year, the monthly nature of National Insurance calculations means that the amount of National Insurance they pay might vary slightly. Unlike Income Tax, National Insurance is not adjusted for the year, so the total paid may differ slightly from what an annual calculation would suggest.
Variable Pay Scenarios
Understanding how salary sacrifice works with different types of variable pay can be complex. Let's explore some common scenarios to see how The Electric Car Scheme can work with various payment structures.
Commission-Based Scenario
Meet Sarah, a sales representative with a variable annual income that averages £45,000. Her monthly income fluctuates based on sales performance, ranging from £2,500 to £5,000 per month. She's interested in leasing a Tesla Model 3 through The Electric Car Scheme, which requires a monthly sacrifice of £612.
Sarah's monthly income variation:
Minimum monthly earnings: £2,500
Maximum monthly earnings: £5,000
Average monthly earnings: £3,750
In Sarah's case, we need to carefully consider if the scheme is suitable. With her minimum monthly earnings at £2,500, a £612 sacrifice would leave her with £1,888 in her lowest-earning months. This could be too close to the National Minimum Wage threshold for comfort, particularly if her income was to decrease further.
Her potential tax savings would vary month to month:
In months earning £2,500: Basic rate tax savings (20% income tax plus 12% National Insurance)
In months earning £5,000: Higher rate tax savings (40% income tax plus 2% National Insurance on earnings above the higher rate threshold)
Given the high monthly sacrifice amount relative to her minimum earnings, Sarah might want to:
Consider a lower-priced electric vehicle model
Wait until her minimum monthly earnings increase
Look for months where she consistently earns above £3,500 to ensure comfortable affordability
Variable Pay Example
Consider James, who works in hospitality management with varying shift patterns. He earns £18.50 per hour, with hours fluctuating between 30-48 hours per week depending on seasonal demands. He's interested in leasing a Volkswagen ID.4 through The Electric Car Scheme for £350 per month.
James's monthly income looks like this:
Quietest months (120 hours): £2,220
Busiest months (192 hours): £3,552
Average annual income: £34,632
Let's check if it's affordable. When James has his quietest month (£2,220), the £350 salary sacrifice would leave him with £1,870 - comfortably above minimum wage. In his busiest months, he'd have £3,202 left after the sacrifice.
Through salary sacrifice, James saves on tax and National Insurance, meaning his £350 payment actually costs him around £238 per month. Since his income stays within the basic tax rate even in busy months, his savings remain consistent throughout the year.
Minimum Payment Thresholds
For employees with variable pay, certain thresholds must be met to participate in salary sacrifice schemes. Here's how the calculations typically work:
Calculate your minimum guaranteed monthly income,
Determine your proposed salary sacrifice amount,
Check the remaining amount stays above the National Minimum Wage.
For example:
Full-time minimum wage (37.5 hours/week): £1,832 (at £12.21/hour),
Recommended buffer above minimum wage: £168,
Safe minimum post-sacrifice income: £2,000.
This means if your minimum monthly income is £2,400, you could consider a maximum salary sacrifice of £400 while maintaining a safe buffer above minimum wage requirements.
Understanding these thresholds helps ensure your salary sacrifice remains affordable and compliant throughout the year, even during months when your income is at its lowest. Before entering any salary sacrifice arrangement, carefully assess your minimum reliable income rather than focusing on average or maximum earnings.
Is Salary Sacrifice Worth It if My Income Varies?
If your monthly salary consistently stays above the National Minimum Wage, even without factoring in commission or bonuses, you shouldn’t have any problems with opting for a salary sacrifice for an electric car.
However, it is crucial to ensure that this is a practical choice for you before proceeding. When considering whether to opt for this type of compensation arrangement, evaluate your total benefits package, including pension contributions and healthcare options. Your employer's policy regarding variable pay and incentives should provide flexibility to accommodate income fluctuations.
Last updated: 20/08/2024
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.
