Electric car salary sacrifice scheme benefits

With a salary sacrifice scheme, you can make a monthly payment towards an electric car from your gross salary – which is your income before tax or national insurance are deducted.
This is classed as a non-cash benefit, so an employer offering this will deduct the monthly cost from your gross before tax and National Insurance contributions are calculated. This can result in tax savings for both the employee and employer.

The scheme works in the same way as other salary sacrifice arrangements, like the cycle to work scheme or a pension scheme.
To provide employees with an electric car salary sacrifice scheme, the company first leases an electric car from a supplier. The employee is then given the option to lease this car in exchange for a part of their salary. The electric car is usually maintained by a third party chosen by the company if it opts for a fully maintained contract, which typically includes routine services, repairs and MOT tests. If you decide to rent the company car, the employer uses that part of your untaxed salary to pay for the electric car. The amount deducted from your income is before national insurance and tax are applied.

There are some great advantages to the electric car salary sacrifice. Chief among them: you won’t have to pay tax on the money spent on your electric car.

Benefits of EV salary sacrifice for employees:

- You might be able to afford brand new electric cars which are otherwise too expensive - You can save by paying before income tax and national insurance contributions - The cost of car ownership often tends to be lower - By choosing electric, you’ll save plenty on fuel costs - You’ll make fixed, tax-free payments - Setting the scheme up with the help of your company can be easier than doing it alone - No initial upfront costs - You’ll pay lower BiK rates compared to petrol/ diesel cars

Benefits of EV salary sacrifice for employers:

- Savings on Class 1A National insurance contributions (NIC) - Enhances the benefits package offered to employees - Can improve employee recruitment and retention - A way to support employees who want to go green - Can reduce business mileage reimbursement costs - Support for corporate social responsibility goals

You’ll usually get insurance included alongside the car. Some schemes also include road tax, servicing, breakdown cover and some include replacements or courtesy cars.

You’ll have to pay the fixed rental charge, which will be less than the monthly rental fee company pays and comes out of your pre-tax salary.
You’ll have to pay for the electricity to charge your car, whether that’s through a home charger or public charging. You can learn more about electric car’s battery charging costs here. You’ll have to pay company car tax on your vehicle, plus Benefit in Kind (BiK) rates.

The BiK rate for electric cars is currently fixed at 2% until April 2025.
From April 2025, the BiK rate will increase by 1% every year until 2028. On the other hand, petrol and diesel company cars will be taxed at car tax rates up to 37% depending upon the CO2 emissions. The new Worldwide Harmonised Light Vehicle Test Procedure (WLTP) will be used to determine the tax rate for such internal combustion engine cars. Confused about what ‘company car’, ‘salary sacrifice’, ‘BiK’ and ‘emissions’ mean? Check out our jargon buster.

The salary sacrificed by the employee and the amount contributed by the employer are calculated based on:
- P11D value of the car (list price plus delivery and VAT) - CO2 emissions - Benefit in Kind (BiK) rate - employee’s income tax rate These figures are used in the following calculations: 1. Start with your company car’s P11D value, e.g. £40,000 2. Multiply the P11D value by the BiK rate (2% in 2024/25, rising to 3% in 2025/26) 3. Multiply your car’s BiK rate by the employee’s income tax rate to find the amount of company car tax payable Example: with a P11D value of £40,000, BiK rate of 2% and personal tax rate of 20%. £40,000 x 2% = £800 (BiK amount) x 0.20 (standing for the 20%) = £160 for the year. The annual taxable pay will be revised each financial year as the BiK rate changes.

Optional Remuneration Arrangements rules, set by HMRC, affect salary sacrifices schemes offered by employers. These rules are applicable whenever a benefit is provided to employees in exchange for giving up a part of their salary or cash pay.
However, ultra-low emission vehicles offered under the sacrifice scheme are exempt from these rules as long as their CO2 emissions are less than 75 grams per kilometre.