Could salary sacrifice revive appetite for electric cars?

Salary sacrifice schemes could be key to driving the uptake of electric cars from private buyers, according to experts.

With the UK’s zero emission vehicle mandate due to be implemented from 1 January 2024, after which time manufacturers will be required to sell an increasing proportion of EVvs, schemes that promise drivers access to cheaper EVs look to be a potent weapon in their efforts to register sufficient numbers.

“Salary sacrifice is a no-brainer and much cheaper than buying and running a new petrol or diesel car,” said Paul Hollick, chairman of the Association of Fleet Professionals. 

“However, the reduction in salary does have an impact on an employee’s pension, while employers have to make sure the scheme they use is insured against the employee leaving during the contract, potentially rendering the employer liable to the payments. 

“And although salary sacrifice could reduce the cost of a VW ID 4 by about £250 a month, salary sacrifice still costs an employee a few hundred pounds a month, and not everyone can afford this.”

Even so, according to a recent industry survey, more than a third of companies now offer the scheme through both established leasing companies and new ones that offer EVs exclusively.

Among the former is Arval UK, which, with the reduction in the BIK rate in 2020, began to throw its weight behind its Arval Ignition scheme. “EVs have really boosted salary sacrifice,” said Richard Cox, an Arval consultant.

“We have around 5000 cars on employers’ schemes, 88% of them EVs. Since 2020, at some companies we’ve been seeing penetration rates among employees in the high single digits, right up to 12-15%. We consider 10% to be a high participation rate for what is an optional benefit.”

What is an electric car salary sacrifice?

Salary sacrifice allows employees to finance a new car, leased by their employer, out of their gross (meaning pre-tax) pay. For employees, the benefit is a new car at significantly less cost than one they could source and finance privately. 

For employers, it’s being able to offer an additional retention and recruitment incentive (although if the scheme reduces an employee’s salary below the minimum wage, it can’t be offered).

How is salary sacrifice calculated?

Until 2020, a major barrier to employees’ EV uptake was the benefit-in-kind (BIK) charge that affects how much tax an employee pays, including on a car obtained through salary sacrifice. The charge is based on a combination of the car’s list price including VAT and extras (together called its P11D value) multiplied by its official CO2 emissions, expressed as a percentage and known as the BIK rate.

The result, multiplied by the user’s personal tax band, is the amount of tax they pay for having the car. In the 2019/20 tax year, the lowest BIK rate was 16%, applied to cars with 0g/km – in other words, EVs.

However, in 2020/21, these cars were derated to just 2%, a move that slashed the tax bill for EV drivers. This rate still applies and will do so until 2024/25, after which it will rise by 1% increments to 5% in 2027/28.

In comparison, the lowest BIK rate on pure-combustion cars (as distinct from hybrids) is 15% and will rise to 18% in the same period.

So EVs incur much lower BIK tax, but salary sacrifice then offers further savings by allowing a car’s monthly lease payment to be deducted (or ‘sacrificed’) from an employee’s gross salary.

The result is that on a car lease costing £600 per month (including maintenance, tyres and insurance), for example, the £240 income tax bill that an employee taxed at 40% pays comes off the lease charge, meaning it actually costs them £360. 

Add the lower BIK tax bill (around £35 per month for a 40% taxpayer leasing a car costing £55,000 or around £600 per month on a four year agreement) and the appeal of leasing a new EV, including most major costs, on salary sacrifice is clear.

Electric car salary sacrifice example

MG 4 EV Long Range

P11D value: £29,985

Private lease cost: £520

20% tax payer

Gross sacrifice: £520

Net sacrifice: £322

40% tax payer

Gross sacrifice: £520

Net sacrifice: £364