Buying an electric car that satisfies your needs is becoming easier over time. Not only do vehicle manufacturers offer more electric models, but there are also new ways for aspiring owners to avail of an electric car.
The electric car salary sacrifice scheme is one such method – and is a very cost-effective way to purchase an electric vehicle.
If you want to introduce a salary sacrifice car scheme for your company, then you need to know the crucial details to help ensure that you have an efficient scheme with your fleet supplier.
This article shares information about salary sacrifice for an electric car and introduces a list of questions and answers to help guide you through the scheme. You will also learn how it benefits both employers and employees.
Electric Car Salary Sacrifice
Salary sacrifice entails providing tax-effective benefits to employees, at no cost or very little to a specific business. In this way, an electric vehicle salary sacrifice scheme allows an employee to pay for an electric vehicle every month with their gross salary before tax deductions and other deductions are made.
It works pretty much the same as other salary sacrifice schemes such as childcare, cycle-to-work, or pension contributions schemes. With salary sacrifice for electric cars, you will not be taxed over the salary you’ve given up if you’re an employee.
You will, however, be paying for BiK (Benefit-in-Kind) tax for electric vehicles – which is only 2% for the financial year 2022/2023. This is why electric vehicle salary sacrifice schemes are an attractive way to offer tax-efficient, zero-emission benefits to employees.
How An Electric Vehicle Salary Sacrifice Scheme Works
A leasing company purchases the new car for you, or from which the company rents from the supplier with contract hire. Your employer pays a monthly fee, usually for a 2-4 year period, which you will then cover through salary sacrifice as the employee.
You may be driving an electric vehicle for either personal or business use. For instance, you may want to buy a Tesla Model 3 RWD, with a 354-mile range and a £43,490 P11D value. With a 3-year business contract with a provider and 8,000 miles of driving per year, you can save at least £20,000 through electric vehicle salary sacrifice compared to purchasing the vehicle directly.
Remember that the amount you can save depends on several factors, including the salary sacrifice scheme provider.
Once the lease period is over, you can return the vehicle and settle any extra damage or mileage. The leasing company sells your car to a second-hand market, but on a few occasions, you may have to option to purchase the vehicle once the lease is over.
For employees
- The most cost-effective way to drive an electric car
- Zero tailpipe emissions
- All servicing, insurance and road tax costs covered
- You can upgrade to a new vehicle after a couple of years, depending on your employer’s rental agreement
- You pay with your gross salary, rather than taxed net pay
- You can insure your partner or family member on the car
- You can use the car for business and personal use
What’s Included With Electric Car Salary Sacrifice
There are no deposits or credit checks for salary sacrifice, and your monthly payment includes:
- Road tax
- Insurance
- Servicing and maintenance (including glass and tyres)
- Breakdown cover
- Accident management
If your company uses LeasePlan’s SalaryPlan salary sacrifice scheme, you can choose an electric vehicle from an approved list every two to three years. At the end of the contract, you can exchange the electric car for a new one, buy it, or simply hand it back.
Salary Sacrifice Electric Car Calculator UK
A salary sacrifice electric car calculator in the UK is a useful tool that helps individuals estimate the financial benefits of opting for an electric vehicle (EV) through a salary sacrifice scheme. Salary sacrifice schemes allow employees to give up a portion of their pre-tax salary in exchange for certain benefits, such as a company car, including electric cars.
To calculate the potential savings and costs associated with a salary sacrifice electric car in the UK, the calculator takes into account various factors, including:
- Vehicle details: The make and model of the electric car you are considering, as well as its purchase price or monthly lease cost.
- Personal income: Your annual salary before tax, which is used to determine the amount you can sacrifice towards the electric car.
- Contract length: The duration of the salary sacrifice agreement, usually between 2 to 4 years.
- Tax bracket: Your income tax bracket, determines the tax savings you can enjoy through salary sacrifice.
- Fuel and maintenance costs: The estimated costs of charging the electric car and its maintenance compared to a conventional petrol or diesel vehicle.
The salary sacrifice electric car calculator then provides you with an estimation of the potential savings you can make through the scheme, including:
- Income tax and National Insurance contributions (NIC) savings: By sacrificing a portion of your salary towards the electric car, you reduce your taxable income, resulting in lower income tax and NIC payments.
- Benefit-in-kind (BIK) tax savings: Electric cars have lower BIK rates compared to petrol or diesel vehicles, resulting in reduced tax liability on the company car benefit.
- Fuel savings: Electric vehicles are generally more cost-effective to run due to lower electricity prices compared to petrol or diesel costs.
- Maintenance savings: Electric cars often require less maintenance and have fewer moving parts, resulting in potential savings on servicing and repairs.
- Overall cost comparison: The calculator may provide a comparison between the overall cost of running an electric car through salary sacrifice versus owning or leasing a petrol or diesel vehicle.
It’s important to note that the accuracy of the salary sacrifice electric car calculator’s results depends on the accuracy of the inputted data and the specific terms and conditions of the salary sacrifice scheme offered by your employer.
What do you need to pay for?
When it comes to salary sacrifice electric car UK as an employee there are three things you need to pay for.
Rental
This is the cost of the car. Your employer cannot charge you more than it costs them to rent from the lease. The cost of the rental is deducted from your gross pay.
Power
For an electric car, you just need to pay for the cost of the electricity required to charge your car. This generally works out at around £2 to £4 per charge on a car with a 250-mile range.
Tax
Benefit in Kind tax (BIK) is 1% for 2021/22, and 2% for 2022/23.
How Can You Order A Car Under Salary Sacrifice?
The scheme provides access to all current makes, models, and specifications available in the UK market. Employees then make their selection and the employer conducts eligibility checks and approves the car order.
The employer leases the car for a period of 24 to 48 months. When the car arrives, the employer reduces the employee’s gross salary in exchange for the benefit of the car. They then use the gross salary sacrificed to cover the lease company’s monthly invoice.
How much work does the HR department require to set up my salary sacrifice scheme?
Very little. The leasing company you sign up with should implement and carry out the majority of the work. Implementation generally takes between 4 to 6 weeks at zero cost to the employer.
Are there limitations to which employees can acquire an electric car through salary sacrifice?
There are no restrictions to which employees can benefit from salary sacrifice HMRC is keen for all employees to have access. There are, however, age restrictions on certain cars based on insurance coverage.
The leasing company will work with employers to ensure employees only have access to the cars they can afford and are legally entitled to drive. There may also be financial restrictions as the amount an individual can sacrifice for a car cannot take them below the National Living Wage.
Does salary sacrifice affect pensions and other benefits?
The majority of companies calculate pensions through notional salary, which is derived from the employee’s salary before they make any salary sacrifice contributions like childcare. The last salary pension can be affected if you were in the last three years of employment before retirement. There may be more impact so it’s best to review the decisions in detail.
The employee’s private pension like a SIPP will not be affected. As with other aspects of pension, it is recommended that employees get professional advice through the company or a financial adviser before signing up for any scheme.
How does it affect the company?
Firstly, it provides a valuable benefit to help companies retain or attract good people to their organisation. A car is generally an employee’s biggest investment aside from a house. Thus, it is perceived to have a high value. With the right scheme, they can recruit more clients to join their company.
Also, employers can take advantage of the National Insurance savings for Ultra Low Emission Vehicles by encouraging employees to purchase a new car with insurance and complete maintenance if they’re fulfilling their Duty of Care obligations.
Lastly, promoting an Ultra-Low Emission Salary Sacrifice scheme helps them improve their carbon footprint.
Does Salary Sacrifice Affect Mortgage Application?
Yes, it is part of the mortgage company’s affordability index that individuals should volunteer their net and gross earnings and outgoings like bank loans, PCP or car HP, or credit cards. All salary sacrifice, therefore, must also be declared.
Must A Company Of a Specific Size Be Eligible for a Salary Sacrifice Scheme?
There’s no legislative limitation in terms of the company’s size since the benefit was made for all employees, not just the company car drivers or directors.
Can The Self-Employed And Sole Traders Set Up A Scheme?
No. according to the HMRC legislation, you must be an employee to be eligible for the salary sacrifice scheme since you’re according with the employer to diversify your employment’s terms and conditions to acquire a benefit in place of a salary.
Small organisations can utilize salary sacrifice schemes and many salary sacrifice providers specialize in serving smaller companies.
What Are Some of The Usual Car Prices?
Here are several salary sacrifice monthly rentals. With the rental comprising insurance, just like any policy, the costs will vary a little in proportion to the driver’s age and location. Monthly rentals also vary according to the driver’s annual mileage.
Such prices encompass the net salary figures, such that you will go from your pay packet each month after tax.
Can I Only Opt For One Car With A Salary Sacrifice Scheme?
The HMRC doesn’t pose a restriction to the number of cars an employee can opt for with this scheme and it all depends on the employee’s affordability and overall benefits system.
Will It Affect Anything If My Company Presently Pays for My Business Travels?
This works just like a company car where the employee is being compensated for business mileage according to the HMRC’s recommended mileage rates.
Benefits of the Electric Car Salary Sacrifice Scheme
In most cases, an electric vehicle salary sacrifice scheme is beneficial for both employers and employees.
For employees, an electric vehicle salary sacrifice scheme will enable them to drive a new electric vehicle for much less than if they’ve leased one privately. With the car’s cost being deducted from the gross salary, your National Insurance Contributions and Income tax will be based on your revised salary. This reduces the NIC and income tax you’re paying every month.
Your employer can also recover the VAT on the maintenance costs and rental it pays. You cannot recover these if you’re leasing an electric car personally, but you can reap more savings in this manner. As an employee, you generally enjoy 30-60% savings after paying a small BiK tax.
What’s more, an electric car salary sacrifice scheme is very comprehensive. The majority must integrate maintenance and servicing costs, repair and unlimited tyre replacements, your vehicle’s road tax, comprehensive motor insurance, and vehicle roadside breakdown and retrieval service within the contract’s time frame. You just need to pay to charge the vehicle.
Benefits To Employers
Purely electric cars can provide great BiK savings while leasing a zero-emission company vehicle on company terms and the employee pays for the lease by sacrificing gross salary with insurance. This creates NIC monthly savings for the employer. Both employer and employee save money in the end.
EV salary sacrifice scheme will not only reduce your business’s carbon footprint but also provide a crucial benefit for all employees. It can be made available with any fleet schemes you’re set into place.
Safety is another extra benefit. Not only will your employees be driving electric cars, but they will also reap the benefits of having an electric vehicle such as the full coverage of road tax and insurance. These benefits are summarized as:
- Lower mileage expenses and fleet risks
- Enhanced staff retention and recruitment
- Potential to counter-balance salary increments
- Lower carbon footprint
- Encourage low-emission motoring
- Serves as an “all employee” benefit
- Increased productivity from motivated and focused staff
- Easier to retain and attract experienced staff members
Is It Worth It To Electric Car Salary Sacrifice?
If you’re looking to own an electric car, then yes. We’re not referring to total affordability, but the ability to access vehicles which your employees could not afford otherwise if they want something purely retail.
A lot of leases integrate maintenance packages such that you’ll determine what you are paying for your monthly motoring. They also cover early termination and insurance. So if you must get out of the deal, or change jobs, you must do it without paying a penalty.
Generally, there are scathing get-out clauses to end financial agreements ahead.
New Salary Sacrifice Changes
Drivers and fleets have experienced major changes throughout the years in terms of salary sacrifice schemes.
Declared Changes
These changes began in the Autumn Statement delivered by Philip Hammond at the closing of 2016. The document confirms that the rules of Optional Remuneration Arrangements were changing – and that includes vehicles acquired with Salary Sacrifice, and cars, are selected where cash alternatives are available.
Instead of being taxed and treated as company cars, the vehicles must be taxed and treated as income instead.
The rules began to change in April 2017. Ever since that time, cars acquired through salary sacrifice (instead of cash alternative) were subjected to National insurance (for employers) and Income Tax (for employees).
Several vehicles were exempted from such change, including ULEVs or Ultra-Low Emission Vehicles, which are vehicles that expel 75g CO2/km of carbon or less.
This is how things have been since then, but another change took place on April 6, 2019. At the time, it is not just the vehicles that are being taxed as income. Other parts of the package that come with the car – like insurance and maintenance, and breakdown cover, are considered taxable benefits.
They are, therefore, also subjected to the Income Tax and Employer’s National Insurance Contributions. The government introduced the measures to fix an “oversight” in the previous rules.
Changes For The Drivers
According to estimates, the latest change can increase the tax bill up to £100 – £240 every year for some drivers. Many of the drivers, though, won’t be affected. It’s worth noting that Salary Sacrifice yields other benefits, such that they can still be considered part of the company’s offering to the employees.
Benefits of Electric Vehicles and Green Cars
What are the other benefits? The first and very obvious is that the employee acquires a new and greener car at a more competitive price. They will also enjoy the convenience of extra features like new tyres which are covered by their workplace’s company car policy.
It also provides drivers with a special motoring package that has fixed accident management, insurance cost, and breakdown cover, along with other services. Despite the latest tax changes, a Salary Sacrifice car remains cheaper compared to one that’s bought without it.
What’s The Motivation For The Scheme’s Setup
You must develop a clear view of what you want to accomplish. Whether you want to reduce your carbon footprint by letting your employees switch to newer, lower-emission vehicles, save money for your business, improve retention and recruitment, improve employee well-being, or a combination of these goals – the supplier of your choice must understand your priorities.
They must offer the expertise to build and design a scheme that meets your organisation’s needs.
How Will You Fund The Scheme?
This is the million-dollar question. Even though the answer can be determined by the business’s financial objectives, It is important to keep in mind that employee experience is a major part of the service’s value.
To get any chance at success, the benefits of a company car must show that it is cost-effective compared to what they can acquire from the retail world.
Any supplier providing a fantastic salary sacrifice product must see the worth in negotiating great discounts, mitigating risks for employers, and ensuring that the employee’s experience is simple, clear and exciting.
A communications plan can break or make a scheme. If the employees cannot easily compare prices and services they’re being provided, they will likely stick to the basics, and this may affect the uptake of the scheme.
How Many Employees Can Use This Scheme?
Even though salary sacrifice is generally very attractive to big companies with many employees, smaller companies may not be exempted from these benefits.
If you’re a medium-sized company with employees fewer than 500, it is important to talk openly about the scheme’s suitability from the start with your provider.
The conversations should include several factors that must be set to deal with a smaller population including mitigation of risk, low staff turnover, accepted benefits platform, and more employees over the minimum wage.
If your provider has undergone various life cycles for salary sacrifice vehicles, then it should have set various real-world examples. This, and a comprehensive study as to whether the scheme is great for your business can help you make an informed decision, irrespective of your employee base and company size.
How can you introduce the scheme to your demographically and geographically diverse employees?
Never underestimate the fact that leasing or purchasing a car is an important choice for employees. Making this choice as simple and clear as possible is just as crucial as trying to receive the lowest price.
At the core, a salary sacrifice scheme provides an opportunity for providers to educate and influence employees who’ve never experienced owning company cars or other benefits-in-kind. Communication must be clear and explain issues that may already be plain to an experienced company car owner.
Developing a specific, tailored communications strategy from a supplier can help educate employees and motivate the experienced ones to decide whether to salary sacrifice a car or not.
Summary
An electric car salary sacrifice scheme is a tax-efficient way to acquire an electric vehicle. It works by taking part of your monthly income before tax and using it to fund repayments for an electric vehicle. The principle of salary sacrifice applies to several goods and services such as vouchers, childcare, pensions, bicycles, education and electric cars.
If you are interested in an electric vehicle and your employer provides a salary sacrifice scheme, going for it would mean that you don’t have to pay tax on the funds used to acquire the car. This is more beneficial compared to a conventional private purchase which compels you to pay for your car out of your pocket wherein taxes and deductibles are taken.
As of now, if you are an employer with more than two earning employees, or an employee searching for an affordable way to shift to electric, this could be an alluring option. Employers can also provide a scheme with their package to retain existing employees and attract new ones.
It also demonstrates that a business is committed to helping out with global and national environmental initiatives. That is the most crucial thing in the long run.
