What Is an Electric Car Salary Sacrifice Scheme?
Switching to an electric car is one of the best ways to reduce your carbon footprint because petrol and diesel cars produce harmful emissions that are released into the environment. Although electric cars are often cheaper in the long term, their upfront cost is typically higher than that of a new petrol car, making them feel unattainable for many. People want to do their part for the planet, but the cost-of-living crisis is preventing them from doing so. In a recent study conducted by our team at The Electric Car Scheme, we found that 53% of British consumers say they cannot afford to reduce their carbon footprints, and 63% of people say price is the biggest barrier to switching to an electric car.
This is where an EV salary sacrifice scheme comes in! Electric car salary sacrifice is an incentive designed by the UK government to get more people driving EVs, ultimately offering a sustainable alternative to traditional petrol or diesel vehicles. The scheme works by an employee leasing a new electric car through your employer for a fixed time (typically three years). The employee then pays for the lease from your salary before income tax and national insurance are deducted from your salary - this means you end up saving hundreds compared to the original lease price every month. This makes electric cars a more affordable option for everyone.
Every company in the UK can help their employees on their journey to net zero by offering a green car scheme, like The Electric Car Scheme, as an employee benefit. For every business to offer electric car salary sacrifice, it has to be a ‘no-brainer,’ which is why The Electric Car Scheme is no cost to the employer and you are protected if the car needs to be returned early.
This blog will guide you through everything you need to know to understand electric car salary sacrifice schemes, covering topics like benefit-in-kind tax, national minimum wage requirements and more!
How does EV salary sacrifice work?
In the introduction, we briefly explained what electric car salary sacrifice is, but you may be wondering how it actually works. EV salary sacrifice is an employee benefit that allows companies to lease an electric car to their employees and in return, employees sacrifice a portion of their earnings to cover lease costs.
Unlike traditional car leases, where payments come from net pay (post-tax income), salary sacrifice deducts expenses from the gross salary (pre-tax income). This tax-efficient approach enables employees to maximise their savings.
At The Electric Car Scheme, we offer an easy-to-use quote tool that allows you to calculate the price of a car based on your salary and lease terms (mileage and length). This tool helps you get an idea of the cars you can choose and how much they would cost.
You can lease the Honda efrom The Electric Car Scheme for £320 per month if you are a 40% taxpayer, leasing for three years and driving 10,000 miles annually. Without a salary sacrifice scheme, the cost would be £475 per month. With the scheme, you'll save £190 from income tax and £9 from national insurance, with an average Benefit in Kind tax of just £44 per month.
What is Benefit in Kind (BIK)?
Electric cars provided through The Electric Car Scheme fall under the category of 'company cars' designated for personal use, making them subject to Benefit in Kind (BIK) tax. Currently, electric cars enjoy a favourable BIK rate of just 2%, valid until 2025, after which it will incrementally increase by 1% annually until 2028.
Calculating BIK tax involves various factors, such as the car’s list price (often referred to as the P11D value), its CO2 emissions, fuel type, and the individual’s personal tax rate. The BIK tax liability rises with higher list prices and CO2 emissions.
BIK tax represents an additional taxable income for employees, subject to income tax. Typically, it is a percentage of the car's list price, with varying percentages based on CO2 emissions and fuel type. This tax is then added to the employee's total taxable income, potentially elevating their overall tax liability.
Here are some important things to know about BiK and electric cars
HM Treasury establishes the BiK tax rate, and it's generally taken out of your salary through PAYE (pay-as-you-earn).
Selecting a zero-emissions plug-in vehicle (i.e., an electric car) instead of a traditional petrol or diesel car can lead to significant savings.
Currently, the BiK rates make electric cars and efficient plug-in hybrids attractive because the company car tax on electric vehicles is considerably lower.
What does company car tax mean?
In the United Kingdom, company car tax, commonly referred to as benefit in kind (BIK) tax, is a tax liability that may be imposed on employees when they receive a company car from their employer for personal use. This tax is predicated on the principle that having a company car is regarded as a work-related benefit or perk, and as such, it carries a taxable value.
How does BiK work at The Electric Car Scheme?
In The Electric Car Scheme’s case, the company benefit we provide is a brand new, heavily discounted electric car. From HMRC’s perspective, this is different or supplementary to your gross salary and so you have to pay BiK tax because you are receiving an additional benefit.
How do I calculate how much Benefit-in-Kind I owe?
It is easy to calculate how much Benefit in Kind tax you owe by following the formula:
P11D value of the car ✕ the BIK rate ✕ your income tax bracket = BIK tax owed
Learn more about Benefit-in-Kind tax in our comprehensive guide which aims to answer frequently asked questions about the topic!
Who is HM Revenue & Customs (HMRC)?
HM Revenue & Customs, more commonly known as HMRC, is the UK’s tax, payments and customs authority. As salary sacrifice is a government incentive, HMRC is responsible for collecting the tax applied to electric cars due to the driver receiving a company car as a benefit of personal use.
Understanding the National Minimum Wage and its relation to Salary Sacrifice
The National Minimum Wage (NMW), which represents the minimum hourly wage that most employees are legally entitled to in the UK, is a critical standard. It is obligatory for all employers, irrespective of the size of their business, to adhere to this mandate set by the UK government. The National Minimum Wage was increased in April 2024, with workers over 21 being entitled to the National Living Wage. You can see the NMW rates from 1st April 2024 in the table below:
| National Minimum Wage rate from 01/04/24 | Increase in pence | Percentage increase | |
|---|---|---|---|
| National Living Wage (21 and over) | £11.44 | £1.02 | 9.8% |
| 18-20 year old rate | £8.60 | £1.11 | 14.8% |
| 16-17 year old rate | £6.40 | £1.12 | 21.2% |
On the other hand, salary sacrifice is a mutual agreement between an employer and an employee, where the employer consents to exchange a portion of the employee's monetary compensation for a non-cash benefit. In our context, this non-cash benefit takes the form of an electric car.
How are they related? The salary sacrifice agreement cannot cause the employee to fall below the National Minimum Wage. Employers must ensure that even after participating in a salary sacrifice scheme, employees continue to receive at least the legally mandated minimum hourly wage.
What do you do if your pay is variable?
An employee receiving variable pay can participate in a salary sacrifice scheme but it cannot be used if the employee’s earnings fall below the National Minimum wage. This requirement is essential to ensure that, even after salary sacrifice deduction, their basic salary consistently remains above the threshold.
How are you protected in an EV salary sacrifice scheme?
EV salary sacrifice schemes involve significant commitment and risk for companies, particularly when leasing brand-new electric cars. For instance, if an employer makes an employee redundant, the company could incur fees up to 50% of the remaining lease costs, potentially amounting to tens of thousands of pounds. Such financial risks often deter companies from offering these schemes. Recent research by The Electric Car Scheme found that 90% of businesses perceive significant risk in offering an electric car salary sacrifice scheme.
To address this, The Electric Car Scheme launched Complete Risk Protection, allowing employers to help employees get into EVs without major financial risks if employees leave during the lease. This package provides immediate reassurance, protecting employers from fees if they need to make redundancies or dismiss employees. Unlike other market offerings with complex terms, exclusion periods, and return limits, our Complete Risk Protection covers employers against costs due to employee resignation, long-term sickness, family leave, or failure to repay for car damage.
If the car must be returned, our Complete Risk Protection shields both employer and employee from unforeseen circumstances. In the table below, you can see what is protected and the reason for return:
If the car must be returned, our Complete Risk Protection shields both employer and employee from unforeseen circumstances. In the table on the left, you can see what is protected and the reason for return.
What is a salary sacrifice schedule?
A month-to-month breakdown of your financial commitment throughout your lease term is invaluable. A salary sacrifice schedule, in this context, refers to an arrangement where an employee willingly allocates a portion of their earnings to access non-cash benefits or privileges - such as the use of an electric car through salary sacrifice.
This schedule constitutes a formal agreement between the employer and employee, outlining the specific amount or percentage of the salary that will be sacrificed. It further details the corresponding benefits the employee will enjoy in exchange for their participation in the salary sacrifice program.
What is The Electric Car Scheme salary sacrifice calculator?
The Electric Car Scheme Salary Sacrifice Calculator is a powerful tool designed to help you explore the array of electric cars available and receive a personalized quote, revealing the incredible savings you can achieve through salary sacrifice.
Using this tool is straightforward – simply provide your company name and some basic information for a tailored quote. Once you've completed a quote using the calculator, you can schedule a consultation with one of our Specialists to delve deeper into the details.
Ready to discover the cost-saving potential of an electric car? Try out our EV salary sacrifice calculator now.
Using our quote tool, you can see the breakdown for any car you choose. Without tax deductions, leasing a Tesla Model Y costs £970 per month. However, with The Electric Car Scheme, you'll save £388 in income tax and £19 in national insurance, and pay £50 in BiK tax. This allows you to lease a Tesla Model Y for £612 per month.
Does EV salary sacrifice impact national insurance?
National insurance contributions (NIC) represent a crucial tax obligation shared by both employers and employees, contributing to government benefit programs.
In the context of salary sacrifice, you're effectively trading a portion of your gross salary (your earnings before tax deductions) for non-cash benefits. This deliberate reduction of your gross salary before taxation carries a notable advantage – it results in savings on your national insurance contributions. By adopting a salary sacrifice arrangement, you can optimize your financial strategy and reduce your national insurance burden.
What is the difference between gross salary and net salary?
Net salary (also known as take-home pay) represents the sum an employee takes home after all deductions, including taxes and other withholdings, have been subtracted from the gross salary. These deductions can include income tax, National Insurance contributions, pension contributions, student loan repayments, and other relevant deductions. The net salary reflects the actual amount an employee receives in their bank account or as a physical paycheck, and it reflects the amount available for spending or saving.
The gap between gross salary and net salary mainly comes from the various taxes, deductions required by the government, and any extra money taken out as agreed between you and your employer.
Employees need to understand the difference between their gross and net salaries so they understand their overall compensation and budgeting. When exploring options like electric car salary sacrifice, the impact on gross and net salary is very important.
What are excess mileage charges?
Excess mileage charges refer to the fees incurred when you exceed your agreed-upon mileage limit. Simply put, the more miles you drive over this limit, the higher the extra cost you'll face. It's important to note that you cannot use salary sacrifice to cover these charges. However, in many cases, you can adjust your mileage allowance during the term - just get in touch with a member of our team to make this change for you.
What does fair wear and tear mean?
When you return your salary sacrifice car, it will be inspected for damages and breakages.
Although it can vary depending on the provider, you are usually allowed some fair wear and tear. The inspector will factor in the age and mileage of the vehicle but will ultimately be looking for large and costly damage.
Refer to your lease provider guidelines for specific information surrounding what they consider acceptable. The BVRLA also provides a guide on fair wear and tear policies that most lease companies adhere to - this can be viewed on their website.
What is a P11D value?
The P11D value of a car is the official price of the vehicle used for tax purposes in the UK. It includes the basic price of the car and any extras or accessories but does not include the Vehicle Excise Duty (VED) or first registration fee.
The P11D value is important because it helps determine how much tax an employee will need to pay if they use a company car for personal reasons. The higher the P11D value of the car, the more tax the employee may have to pay.
To work out the tax, a percentage based on the car's carbon dioxide (CO2) emissions and fuel type is applied to the P11D value. This amount is then added to the employee's overall taxable income. If the car has high emissions, the taxable amount will be higher and so will the tax liability for the employee.
Remember that the specific rules and regulations related to the P11D value and tax calculations may differ in other countries, so it's best to check with your local tax authority for accurate information.
What are P11D and P11D(b) forms?
A P11D form is an HMRC document for an employer to report annual expenses and benefits that employees and directors receive. A P11D (b) form is used to declare Class 1A national insurance contributions an employee owes for the year.
If you sign up your business to The Electric Car Scheme, we will help with the submission of these forms to HMRC.
Comparing Car Allowance and Salary Sacrifice: Which option suits me best?
Company car allowances aren't tax-free, so they can cost you and your employer more, depending on your situation. A salary sacrifice car scheme can be a better deal than taking a taxable cash allowance. If you're in a higher tax bracket, you'll pay less tax by using your cash to get a car through salary sacrifice. Joining a salary sacrifice scheme also means you won't have to pay National Insurance on the car, saving you money. With a salary sacrifice car scheme, you can save on running costs such as maintenance, repairs, servicing, and insurance, as the scheme may cover these expenses, much like The Electric Car Scheme.
Ultimately, it depends on which type of savings matters more to you. If you prefer having money in your pocket and don't mind incurring higher taxes, you may opt for the car allowance. But if you want to make tangible tax savings, then the salary sacrifice scheme is the way to go.
What does the term marginal tax rate mean?
In the UK, the marginal tax rate signifies the tax rate that applies to the highest portion of your earnings. The UK's tax system is progressive, which means that as your income rises, so does the tax rate you'll pay.
Here are the current marginal tax rates in the UK:
Basic Rate: A 20% tax rate applies to income between the Personal Allowance (set at £12,570 for the tax year 2023/2024) and the basic rate limit (which stands at £50,270 for the tax year 2021/2022).
Higher Rate: If your income exceeds the basic rate limit (currently £50,271 for the tax year 2023/2024) but doesn't go beyond the additional rate threshold (set at £125,140 for the tax year 2023/2024), a 40% tax rate applies.
Additional Rate: For income surpassing the additional rate threshold (over £125,140 in the tax year 2023/2024), a 45% tax rate comes into play.
It is important to keep in mind that tax rates can change over time, subject to government adjustments. To stay updated with the most accurate and current information regarding UK marginal tax rates, it's advisable to visit official government sources or consult a tax professional. If you are exploring options like salary sacrifice for an electric car, understanding your marginal tax rate is essential to make informed financial decisions.
Why choose The Electric Car Scheme as my EV salary sacrifice provider?
At The Electric Car Scheme, we aim to make the switch to an electric car scheme as simple as possible. We offer market-leading risk protection, have access to the top leasing companies and we also offer used EV salary sacrifice.
We expanded our offering earlier this year to also include used electric cars, which is now the most affordable way of getting into an EV. Whether you choose a used or new car, the process will be the same. The Electric Car Scheme will provide the same package, support and service to you and your company. If you're unfamiliar with salary sacrifice and want to understand how it can benefit your business, we suggest checking out our ‘How it Works’ page here. In the table below, we have compared a new versus used Kia Niro EV to show the price difference. You could be paying £411 per month to lease a new Kia Niro compared to £252 per month for a used Kia.
How do the company benefit from offering an electric car salary sacrifice scheme?
If you choose The Electric Car Scheme as your salary sacrifice provider, you will receive the best prices on electric cars, unrivalled protection and a trusted 5* service. There are many benefits you get by offering this as an employee benefit:
Complete risk protection - Companies and employees shouldn't worry about extra fees if their electric car needs to be returned early due to unforeseen circumstances. That's why unrivalled protection is included to give you and your team peace of mind.
No net cost to your business to run the scheme - Net zero choices should be affordable for all. With no setup or running costs, our fee is equivalent to your employer's tax savings, so you can roll out the scheme at no cost to your business.
Make your team feel rewarded - By offering this benefit you can support their journey to Net Zero and directly reduce your company’s carbon emissions. You can save your team 30-60% on the cost of their car through salary sacrifice.
Straightforward reporting - It’s easy to keep your HR, Finance and Tax affairs on track. Our automated
monthly payroll, HMRC and climate reporting help you with compliance and minimise hassle.
Happy and healthier company - Employee happiness is at the heart of a healthy, thriving company. With The Electric Car Scheme, you can show your commitment to sustainability. Your employees will appreciate the opportunity to make a positive impact.
Learn more about The Electric Car Scheme and how salary sacrifice works by visiting our website!
Last updated: 19/07/2024
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.
