Electric Car Salary Sacrifice: Tax Savings Breakdown By Income Bracket
Switching to an electric car is a significant step toward reducing your carbon footprint, but the upfront costs can be a barrier. Electric car salary sacrifice schemes have quickly become extremely popular in the UK as they make EVs more accessible and affordable for employees across all income levels. Especially, now, as many EV salary sacrifice schemes also offer second-hand cars to lease too.
Unlike traditional explanations of salary sacrifice that focus broadly on the concept, this article provides a detailed breakdown of exactly how much you could save based on your specific tax bracket. Using current 2024/2025 tax rates, we'll demonstrate precisely how these savings are calculated and what they mean for your monthly budget.
Whether you're a basic, higher, or additional rate taxpayer, understanding the tax implications of salary sacrifice could help you access an electric car for significantly less than you might expect.
Understanding How EV Salary Sacrifice Creates Tax Savings
An electric car salary sacrifice scheme works by allowing employees to "sacrifice" a portion of their gross salary in exchange for an electric vehicle. Since the sacrifice happens before tax deductions, you pay less income tax and National Insurance contributions.
The tax savings come from three main components:
Income Tax Reduction: You pay less income tax because your taxable income is reduced by the amount of the salary sacrifice.
National Insurance Contribution (NIC) Reduction: Both you and your employer pay less in NICs due to the reduced gross salary.
Low Benefit in Kind (BIK) Taxation: While you do pay some tax on the benefit received (the car), electric vehicles currently have a very low BIK rate of just 2%.
The greater your tax rate, the more you save through the reduction in income tax, which is why higher and additional rate taxpayers see the most significant benefits.
Current UK Tax Brackets and Rates (2024/2025)
Before looking at the specific savings, let's review the current UK tax brackets for the 2024/2025 tax year:
| Income Band | Income Tax Rate | National Insurance Rate |
|---|---|---|
| Personal Allowance (up to £12,570) | 0% | 0% |
| Basic Rate (£12,571 to £50,270) | 20% | 12% |
| Higher Rate (£50,271 to £125,140) | 40% | 2% |
| Additional Rate (over £125,140) | 45% | 2% |
As previously mentioned the current Benefit in Kind (BIK) rate for electric cars is fixed at 2% until April 2025. This exceptionally low rate (compared to rates of 20-40% for many petrol and diesel vehicles) is a significant factor in making salary sacrifice for electric cars so advantageous.
Detailed Tax Savings Breakdown By Income Bracket
Let's examine how these tax savings apply in practice across different income brackets, using a range of popular electric vehicles as examples.
For Basic Rate Taxpayers (20%)
If you're a basic rate taxpayer earning between £12,571 and £50,270, here's how your savings would break down on three different electric cars:
Example 1: MG4 SE (Entry-Level Option)
| £40,000 / MG4 | Cost Breakdown |
|---|---|
| Average Monthly Salary Sacrifice (inc VAT) | £418 |
| Employee Income Tax Savings | -£84 |
| Employee National Insurance Savings | -£33 |
| Average Benefit-in-Kind Over Term | £17 |
| Net Cost / You Pay | £319 |
The cost breakdown was established by using The Electric Car Scheme’s online quote tool and the terms used were as follows: £40,000 annual salary, 3 year lease agreement and 10,000 miles per annum on a flat payment profile. All of the tables following will use the same terms, only the total annual earnings will change, which can be found in the first column of each table.
Example 2: Tesla Model 3 (Mid-Range Option)
| £40,000 / Tesla Model 3 | Cost Breakdown |
|---|---|
| Average Monthly Salary Sacrifice (inc VAT) | £739 |
| Employee Income Tax Savings | -£148 |
| Employee National Insurance Savings | -£59 |
| Average Benefit-in-Kind Over Term | £30 |
| Net Cost / You Pay | £562 |
For Higher Rate Taxpayers (40%)
If you earn between £50,271 and £125,140, you'll benefit from 40% tax relief on your salary sacrifice amount:
Example 1: MG4 SE (Entry-Level Option)
| £70,000 / MG4 | Cost Breakdown |
|---|---|
| Average Monthly Salary Sacrifice (inc VAT) | £418 |
| Employee Income Tax Savings | -£167 |
| Employee National Insurance Savings | -£8 |
| Average Benefit-in-Kind Over Term | £35 |
| Net Cost / You Pay | £278 |
Higher rate tax payers will pay less on their salary sacrifice EV, as you can see in this example. The 40% taxpayer pays £278 per month for the MG4 whereas someone who is a 20% tax payer, will pay £319. This is because the 40% taxpayer is able to save more on income tax.
Example 2: Tesla Model 3 (Mid-Range Option)
| £70,000 / Tesla Model 3 | Cost Breakdown |
|---|---|
| Average Monthly Salary Sacrifice (inc VAT) | £739 |
| Employee Income Tax Savings | -£295 |
| Employee National Insurance Savings | -£15 |
| Average Benefit-in-Kind Over Term | £61 |
| Net Cost / You Pay | £489 |
or Additional Rate Taxpayers (45%)
For those earning over £125,140, the tax advantages of salary sacrifice are even more substantial:
Example 1: Tesla Model 3 (Mid-Range Option)
| £125,140 / Tesla Model 3 | Cost Breakdown |
|---|---|
| Average Monthly Salary Sacrifice (inc VAT) | £739 |
| Employee Income Tax Savings | -£443 |
| Employee National Insurance Savings | -£15 |
| Average Benefit-in-Kind Over Term | £91 |
| Net Cost / You Pay | £372 |
Example 2: Porsche Macan (Premium Option)
| £125,140 / Porsche Macan | Cost Breakdown |
|---|---|
| Average Monthly Salary Sacrifice (inc VAT) | £1,391 |
| Employee Income Tax Savings | -£835 |
| Employee National Insurance Savings | -£28 |
| Average Benefit-in-Kind Over Term | £139 |
| Net Cost / You Pay | £667 |
The luxury Porsche Macan showcases the most dramatic savings possible through salary sacrifice. Additional rate taxpayers can drive this car for £667 per month - almost £730 less than the standard lease cost.
Tax Savings Calculator: Get Your Personalised Lease Cost
While these examples provide a general overview, your specific savings will depend on your exact salary, chosen vehicle, and lease terms. Our quote tool provides personalised estimates based on your circumstances.
To use the calculator:
Enter your annual salary,
Select your desired vehicle,
Choose your lease term and mileage,
View your potential savings.
This tool helps you understand exactly how much you could save through salary sacrifice based on your unique situation. Try our calculator to get a personalised quote today.
What Is Benefit in Kind (BIK) Tax?
The Benefit in Kind (BIK) rate is a crucial component in calculating the tax efficiency of a salary sacrifice scheme. Electric vehicles currently enjoy an extremely favourable BIK rate of just 2%, which is scheduled to remain until April 2025.
Future BIK Rates for Electric Vehicles
While the current rate is 2%, the government has announced the following scheduled increases:
| Tax Year | BiK Rates For EVs | |
|---|---|---|
| 2024/25 | 2% | |
| 2025/26 | 3% | |
| 2026/27 | 4% | |
| 2027/28 | 5% |
Even with these incremental increases, electric vehicles will maintain a significant advantage over petrol and diesel alternatives, which typically have BIK rates of 20-40%.
Things To Consider
While electric car salary sacrifice schemes offer substantial benefits now, several factors may impact future savings:
1. BIK Rate Increases
As mentioned, BIK rates for electric vehicles will increase gradually from 2025 onwards. While the increases are modest, they will slightly reduce the overall tax efficiency of salary sacrifice schemes over time.
2. Potential Tax Policy Changes
Future budgets may bring changes to income tax rates, National Insurance contributions, or the treatment of salary sacrifice arrangements. The current framework is highly favourable, but policy changes could alter the landscape.
3. Electric Vehicle Market Evolution
As the EV market matures, we may see changes in vehicle pricing and lease costs. The increasing variety of models and growing competition could lead to more competitive pricing.
Given these considerations, the best time to join an electric car salary sacrifice scheme is now, while BIK rates remain at their lowest and the tax advantages are at their peak.
With potential savings of thousands of pounds and the environmental benefits of switching to an electric vehicle, salary sacrifice represents one of the most cost-effective ways to do so! Take the first step toward affordable, sustainable driving with The Electric Car Scheme.
Last updated: 28.02.25
