Electric Car Salary
Sacrifice Calculator

While the term salary sacrifice might sound a bit scary, it’s actually a government-backed scheme that helps employers and employees in the UK to save on the tax they pay. In practice, it is an agreement between the employee and employer where an employee agrees to forfeit a portion of their cash salary in exchange for a non-cash benefit from their employer.

In such an arrangement, the employee’s gross salary decreases by the agreed-upon amount, leading to reduced National Insurance contributions for both the employee and the employer. The employee also reduces the amount of income tax they pay in relation to the amount of salary they have sacrificed.

Typically, employers provide options such as childcare, healthcare, transport, and enhanced pension contributions. These benefits are optional, and employees can choose to join or leave these programs as they wish.

Generally, salary sacrifice schemes, including electric vehicle leasing, should be made available to all employees.

EV salary sacrifice schemes allow you to lease a new electric car through your employer for a set period, such as a year or longer. You pay for the lease directly from your pre-tax salary, before income tax and National Insurance deductions are applied. This arrangement saves you the tax you would have otherwise paid on the lease amount.

Employers typically work with leasing companies to provide these vehicles. The terms of the agreement, including duration and the type of vehicle available, are predefined, and employees must agree to these terms.

Using a salary sacrifice scheme for an electric vehicle (EV) offers several benefits for both employees and employers:

For employees, since the lease payments are deducted from the gross salary before tax and National Insurance contributions are calculated, employees pay less income tax and NICs. This effectively reduces the overall cost of the vehicle. 

In addition to being a greener choice that’s better for the environment than petrol or diesel cars, electric vehicles generally have lower running costs too. Currently, electric vehicles do not have to pay for road tax.

Compared to leasing a petrol or diesel car, electric vehicles benefit from lower Benefit-in-Kind (BIK) tax rates

Employers also benefit from reduced National Insurance contributions because the employee’s gross salary is reduced. Softer benefits to employers include enhancing the employer’s benefits package which, in turn, may help to reduce recruitment costs. Providing access to electric vehicles also helps companies enhance their CSR profile. 

In a salary sacrifice scheme for an electric vehicle (EV) lease, the car is owned by the leasing company, not the employee. The employer typically arranges the lease agreement with the leasing company and then offers the car to the employee under the terms of the salary sacrifice arrangement. 

The employee uses the car for the duration of the lease term but does not hold ownership. At the end of the lease period, the employee usually has the option to return the vehicle, extend the lease, or sometimes purchase the car at market value, depending on the terms set out in the lease agreement.

A salary sacrifice agreement should not lower an employee’s cash earnings beneath the National Minimum Wage (NMW) levels. Employers are required to establish measures to limit deductions from salary sacrifices and guarantee compliance with NMW standards.

It depends on the terms of the salary sacrifice scheme offered by your employer but, in theory, as long as your salary does not reduce below the national living wage after all salary sacrifice deductions have been made, then yes it is possible to lease more than one EV using salary sacrifice.

Benefit-in-kind (BIK) is a tax imposed on employees who receive perks or benefits in addition to their salary. For instance, if you use a company car for private purposes, you’ll need to pay BIK tax, often referred to as company car tax. Each car is assigned a specific BIK percentage band.

Your employer deducts the tax you owe directly from your salary using the Pay As You Earn (PAYE) system. The tax amount you pay depends on the type and value of the benefits you receive, which is determined by your employer.

For new electric vehicles, the BIK rate for electric cars is currently set at 2% and will remain so until April 2025. Starting in April 2025, the BIK rate for EVs will increase by 1% each year until 2028.

Participating in an electric vehicle (EV) salary sacrifice scheme can impact various state benefits, as outlined below:

• Parental Pay: If your average gross weekly earnings fall below the weekly earnings threshold due to the salary sacrifice, your entitlement to Statutory Maternity Pay (SMP), Statutory Paternity Pay (SPP), or Statutory Adoption Pay (SAP) may be affected.
• Contribution-based Benefits: Your future entitlement to benefits like the ‘new style’ Employment and Support Allowance and Jobseeker’s Allowance might be reduced if your gross salary drops below the Lower Earnings Limit (LEL). However, the scheme ensures that your Revised Salary does not fall below this threshold.
• Child Benefit: For those earning over £50,000, a tax charge applies to Child Benefit. Participating in the scheme could reduce or eliminate this tax charge since HMRC will consider your lower Revised Salary rather than your original salary.
• State Pension: Your eligibility for the new State Pension depends on your annual salary; you must earn more than the Lower Earnings Limit (currently £6,396 per year) to qualify for the State Pension. As long as your gross salary remains above this threshold, participating in the Scheme should not impact your entitlement to the State Pension.
• Tax Credits: Your entitlement to tax credits could change due to the salary sacrifice. While HMRC will consider your lower Revised Salary in their calculations, they will also account for the Benefit-in-Kind (BIK) you pay on your company car. Given the low BIK rates for zero-emission cars until April 2025, your tax credits may potentially increase.
• Universal Credit: Participation in the scheme could lead to a reduced net salary after deductions like Income Tax, NICs, and pension contributions. This reduction may increase your entitlement to Universal Credit.

For specific concerns about how salary sacrifice might affect your personal financial situation, you should speak with your HR/Payroll team.

Loan repayments to the Student Loan Company are determined based on gross earnings that are subject to Class 1 National Insurance Contributions (NIC), once earnings exceed the annual repayment income threshold.

By participating in the scheme, which reduces your gross salary that is subject to Class 1 NIC, your repayments to the Student Loan Company should also decrease.

Participating in a salary sacrifice scheme can impact your ability to secure other forms of finance by reducing your gross income, which lenders use to assess loan applications. This reduction can affect your borrowing capacity, creditworthiness, and the amount you can borrow, particularly for mortgages, potentially limiting your access to favourable loan terms and interest rates. 

However, some lenders may adjust their evaluations to consider the nature of salary sacrifices, especially if the sacrifice is for significant benefits like pensions. It’s advisable to explain your salary structure when applying for loans and consult a financial advisor to understand the full implications of entering into a salary sacrifice scheme on your financial situation and future financing needs.

If an employee leaves the company or the salary sacrifice contract ends, there are usually provisions on how to handle the remaining payments or the return of the vehicle.