Electric Car Salary Sacrifice and Variable Pay: How It Works
In the UK, the ban on buying new petrol and diesel cars is nearing closer (it will be implemented in 2035) and more people are now looking to get into electric cars now more than ever. However, the largest barrier for many is the upfront cost of buying or even leasing an EV. The team at The Electric Car Scheme recently analysed the annual fuel costs for an average UK driver travelling 7,400 miles a year. The cost to run a petrol car for a year was £1,268 yet the price to charge an EV is £680 - meaning, a petrol driver would have spent more on fuel by the middle of July than an EV driver would spend all year.
To get more people driving EVs, the UK Government introduced electric car salary sacrifice schemes, which offer a sustainable alternative to traditional petrol or diesel cars. The scheme works by an employee leasing a new car through your employer for a certain length of time. The employee will then pay for the lease from their salary before Income Tax and National Insurance are deducted from their salary.
Companies can implement an electric car salary sacrifice scheme as an employee benefit. At The Electric Car Scheme, this comes at no extra cost to the employer and they are protected if the car needs to be returned early through our Complete Risk Protection offering.
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!
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.
Common uses include saving for retirement, covering childcare expenses, purchasing a bike, or leasing a car. Employers implement salary sacrifice by modifying employment contracts. 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.
What Are The Benefits of Electric Car Salary Sacrifice For Employees?
The main advantage for employees engaging in a green car scheme is the reduced price of an electric car.
At The Electric Car Scheme, you can save between 30% and 60% on the price of a new or used EV, thanks to our access to the top leasing companies which gets us the best prices. It’s also easy to add everything you need into one bundle and get the full tax savings on maintenance, breakdown cover, comprehensive car insurance and a home charge point!
You may be wondering how those earning a variable income, like bonuses or commissions may be affected by this benefit. Let’s have a closer look at how your salary sacrifice savings are calculated depending on your salary.
How Are Your Salary Sacrifice Savings Calculated Depending on Your Salary?
The amount of tax you pay in total each year is determined by two factors:
The portion of your tax that exceeds your Personal Allowance,
The tax band you fall into.
Below, you can see a table that shows the tax rates you pay in depending on how much you earn per annum:
| Band | Taxable Income | Tax Rate |
|---|---|---|
| Personal Allowance | Up to £12,570 | 0% |
| Basic Rate | £12,571 to £50,270 | 20% |
| Higher Rate | £50,271 to £125,140 | 40% |
| Additional Rate | Over £125,140 | 45% |
How Does Your Tax Bracket Affect Your Salary Sacrifice Contributions?
As aforementioned, as an employee who wants to use your salary sacrifice scheme, your salary cannot fall below NMW when leasing the car. Employees need to consider their pension, mortgage, insurance, maternity pay etc when considering whether they should lease a car.
The graphics below show two popular electric cars on the market right now - showing how the monthly breakdown will work. This includes how much you will save on Income Tax and National Insurance Savings. To get the breakdown below, we inputted a £70,000 salary per annum (which equates to a 40% tax bracket earner), over 10,000 miles per annum throughout a three-year lease on a flat-payment profile. You can use our initiative quote tool to input your desired lease details and get a personalised quote!
You can enjoy significant savings by leasing a Tesla Model Y through salary sacrifice. By leasing this car without a government car scheme, you would pay £749 per month.
With a salary sacrifice scheme, you will save £300 per month on Income Tax savings, and £15 in National Insurance contributions, meaning the Net Cost to pay will be £485 per month! You will need to pay a small sum of Benefit-in-Kind tax, otherwise known as Company Car tax or BiK.
Last year, the MG4 secured the third spot in popularity at The Electric Car Scheme. With five models available - SE, SE Long Range, Trophy, and Trophy Long Range - the standard range base, SE, features a 51kWh battery and can achieve a range of 218 miles. Despite the monthly gross cost being £390, the salary sacrifice savings make it possible to own this car for just £257 per month - saving you over £100 every month through salary sacrifice!
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.
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 The National Minimum Wage, particularly in months without additional pay.
The table below shows the National Minimum Wage from April 2024.
| 21 and over | 18 to 20 | Under 18 | Apprentice | Apprentice | |
|---|---|---|---|---|---|
| Current Rate (as of April 2024) | £11.44 | £8.60 | £6.40 | £6.40 | £5.28 |
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.
Consequently, 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.
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 should encounter no problems with opting for a salary sacrifice for an electric car. It's crucial to ensure that this is a practical choice for you before proceeding.
Learn More About Electric Car Salary Sacrifice With the Electric Car Scheme
Instead of leasing a car the normal way, salary sacrifice allows employees to lease electric cars via their employers. Government tax incentives promote sustainable choices, but they can be complex and difficult to access. The Electric Car Scheme makes it simple to access these incentives to transition to Net Zero. Employees can access an electric car by sacrificing a portion of their pre-tax salary. Usually, when leasing cars, the employee would pay with their net salary (after tax). With salary sacrifice, the employee deduces this from their gross salary (before tax), meaning this comes from income tax and national insurance.
Employers can attract and retain top talent, improve their ESG goals and save money in the long term by providing this as an employee benefit. As an employer, you can give employees access to a huge range of electric cars. You can read more about what salary sacrifice is, how it works and the benefits for both employees and employers in our blog: are salary sacrifice schemes a good idea?
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.
