Salary Sacrifice Or Personal Lease: Which Is Right For You?
Switching to an electric vehicle is an exciting step toward a more eco-conscious and cost-efficient future. But when it comes to getting behind the wheel of your dream EV, should you opt for a salary sacrifice scheme or a personal lease? Both options have advantages and drawbacks that can help inform your decision.
In this article, we’ll break down the key differences, highlight the similarities, a price comparison and help you uncover which route fits your lifestyle and financial goals best. Ready to electrify your commute? Let’s dive in!
The Basics: Understanding Your EV Options
The first hurdle is to make sure you understand the difference between car leasing and electric car salary sacrifice schemes and how they both work.
What Is Car Leasing?
Car leasing lets you drive a car without buying it outright.
You agree to rent the car from a leasing company for 2–4 years, making monthly payments based on depreciation, fees, and interest, all paid with post-tax income. At the end of the lease, you can return the car, lease a new one, or sometimes buy it at its residual value.
Leasing is perfect for those who enjoy new models without ownership commitments, but be mindful of mileage limits and wear-and-tear charges.
What Is Electric Car Salary Sacrifice?
Electric car salary sacrifice is a UK government-backed incentive scheme to promote EV adoption and support the nation’s net-zero goal by 2050.
Employees lease an electric car by sacrificing part of their pre-tax salary, lowering their taxable income and saving on costs compared to traditional leasing or buying. Monthly payments often cover extras like maintenance, insurance, and breakdown cover.
This scheme makes EVs more affordable and accessible, driving the UK toward greener transportation and a reduced carbon footprint.
Car Leasing vs EV Salary Sacrifice: The Main Differences
Let’s dive into what you’ve been waiting for, here are the main differences between EV salary sacrifice schemes and car leasing:
Monthly Payments
The main difference between the two is how the monthly payments are handled and calculated.
Car Lease
With car leasing, you pay a fixed monthly fee using your post-tax income (the money left after taxes are deducted from your salary). These payments cover the car's depreciation over the lease term, along with any additional fees or interest. Since they are made from your net income, there are no direct tax advantages.
EV Salary Sacrifice
Salary sacrifice schemes allow you to lease a car by sacrificing a portion of your pre-tax income. This reduces your taxable income and the amount of tax you pay, effectively lowering the cost of the vehicle compared to traditional leasing. This is calculated based on your salary, the tax bracket you fall into and lease terms.
The monthly payment typically includes extras like maintenance, insurance, and breakdown cover, all bundled into one cost-efficient package.
Tax Benefits
This has been partially covered above, but let’s look at the tax benefits of both options.
Car Lease
There are no direct tax benefits associated with personal car leasing. You will pay the full cost of the lease from your post-tax income, so it doesn't reduce your tax liability.
EV Salary Sacrifice
This scheme offers significant tax advantages. By reducing your taxable income, you pay less in income tax and National Insurance. As this is a benefit provided by your company, this is technically a company car benefit which has low Benefit-in-Kind (BIK) tax rates, making this option particularly cost-effective.
Eligibility
There are some differences between the two when it comes to eligibility requirements.
Car Lease
Generally, anyone with a good credit score and a stable income can apply for a car lease. The primary eligibility criteria are based on financial stability and creditworthiness, as leasing companies want assurance that the lessee can make regular payments.
Salary Sacrifice
This option is typically available to employees of participating companies. The scheme requires your employer to offer EV salary sacrifice as an employee benefit, and eligibility may depend on your employment status and length of service. Additionally, the scheme is often limited to those on a certain income threshold or tax band, because your salary must not drop below minimum wage at any point in the agreement.
Included Services
Again, one of the main differences between leasing and salary sacrificing an electric car is the services included in the monthly cost.
Car Lease
Leasing often covers only the use of the vehicle, and extras like maintenance, insurance, or breakdown cover are typically added at an additional cost.
EV Salary Sacrifice
Monthly payments generally include a comprehensive package covering maintenance, insurance, and breakdown cover, making it a hassle-free option.
Agreement Terms
The agreement terms for leasing and salary sacrifice are generally very similar with some small, but important, differences.
Car Lease
Car leases usually last 2–4 years, offering fixed-term agreements with predictable payments. At the end of the term, you can return the car, lease another, or sometimes buy it. It’s ideal for those who like driving new cars without long-term ownership.
EV Salary Sacrifice
Similar to leasing, salary sacrifice agreements run for 2–4 years but are tied to your employment. They bundle costs like insurance and maintenance into one payment and include tax savings, making EVs more affordable. Early termination may apply if you change jobs.
Flexibility At The End Of The Agreement
Both options offer different end-of-contract choices, so it's important to consider this before committing to an EV contract if you plan to keep the car.
Car Lease
At the end of a lease, you usually have options to return the car, lease another one, or purchase the vehicle at its residual value. However, there’s no guarantee of ownership unless explicitly arranged.
EV Salary Sacrifice
These agreements are tied to your employment. If you leave your job before the end of the contract, there might be early termination fees or other conditions to consider. In some instances, at the end of the contract, there may be the option to keep the car, but this is something to be debated with the lease and salary sacrifice provider.
What’s Cheaper? Salary Sacrifice Or Car Leasing?
The cost of salary sacrifice versus car leasing depends on your circumstances, but in many cases, salary sacrifice can be cheaper.
Here's why:
Tax Savings: Salary sacrifice reduces your taxable income, so you will pay less in National Insurance and Income Tax. This will lower the cost of leasing the car in comparison to traditional car leases which you will pay for with your pre-tax income. This will also ultimately mean, your monthly payments are lower if you choose to salary sacrifice an electric car.
Bundled Benefits: Salary sacrifice lease agreements often include maintenance, insurance and breakdown cover, which can make them more cost-effective compared to a traditional lease where you have to pay for these separately.
Here’s a table comparing salary sacrifice and traditional car leasing for an MG4 Trophy Long Range 64kWh EV, covering what you can and can’t bundle, along with estimated costs:
| Feature | Salary Sacrifice | Traditional Car Leasing |
|---|---|---|
| Monthly Payment | From £290 (if you choose The Electric Car Scheme as your salary sacrifice provider) | From £292 (post-tax income) |
| Included Benefits | Insurance, maintenance, breakdown cover, tax savings | Vehicle only (add-ons like insurance, maintenance are extra) |
| Tax Savings | Yes, reduces taxable income, lower overall cost | No tax savings, full payment from post-tax income |
| Insurance | Included | Typically not included, extra cost can range from £50-£100 per month |
| Maintenance | Included | Not included, typically £28.58 per month |
| Breakdown Cover | Included | Not included, typically between £5 - £10 per month |
| Flexibility | Commitment tied to employment, fixed term (2-4 years) | More flexible in terms of contract length and returns |
| Early Termination | Possible penalties if leaving job early | Typically no penalties (outside of damage/mileage terms) |
| End of Term Options | Return vehicle, lease another, or buy at residual value | Return vehicle, lease another, or buy at residual value |
| Total Estimated Monthly Cost | £290 per month (after tax savings and bundled benefits) | £335 per month (including the additional costs for insurance, maintenance, breakdown cover) |
The estimated costs for running an MG4 Trophy 64kWh Long Range over three years (10,000 miles per annum) are as follows: Insurance costs range from £600 to £1,200 annually, according to Nationwide Vehicle Contracts. Maintenance is £28.58 per month, based on their package. Breakdown cover is estimated at £60 to £120 annually, based on typical prices. Tyre replacement costs about £10 to £20 per month, based on general tyre replacement estimates.
So, how do the two compare?
If you choose to salary sacrifice the MG4, you would spend £290 monthly on the lease cost which includes insurance, breakdown cover, tyres and maintenance.
If you choose to lease an MG4, you will pay approximately £335 per month. Although the initial lease cost is lower, you have to pay for everything else on top of the lease cost.
Should I Choose Salary Sacrifice Or A Lease For My Next EV?
Now that we've covered the key differences between car leasing and EV salary sacrifice, you may still be wondering which option best suits your needs. Both have strong benefits, but your decision will depend on factors like tax savings, flexibility, and convenience.
Consider your financial goals, income, and personal circumstances before choosing. Salary sacrifice offers tax benefits but requires a longer-term commitment, while car leasing provides more flexibility if you anticipate significant life changes. Weighing these factors will help you make the most informed choice.
Choose Car Leasing If…
You prefer straightforward monthly payments and don’t need any tax benefits,
You’re comfortable handling extras like maintenance and insurance separately,
You value the flexibility to switch or purchase the vehicle at the end of the lease.
Choose EV Salary Sacrifice If…
You want to maximise tax savings and reduce your overall vehicle costs,
You appreciate an all-in-one package that includes maintenance, insurance, and breakdown cover,
You’re confident in your job stability and can commit to the agreement’s terms.
By understanding these key differences, you can decide which option aligns best with your lifestyle, financial goals, and preferences.
Still on the fence? Consider speaking to a car leasing specialist or visit The Electric Car Scheme’s quote tool to see what cars are available through EV salary sacrifice and how much you could save on national insurance contributions and income tax.
Before choosing between car leasing and salary sacrifice, consider your financial goals, income, and personal circumstances. A salary sacrifice scheme offers tax savings but may require a longer-term commitment. If you anticipate significant life changes, such as a job change or career break, car leasing may offer more flexibility. It’s important to weigh the options based on your specific situation to make the most informed choice.
Last updated: 17/12/24
Our 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.
