With employees increasingly interested in electric vehicles (EVs), offering them as part of a salary sacrifice car scheme can support an organisation’s green credentials and help staff save money. Here’s what employers need to know.
More and more companies are stating their environmental credentials, with some pledging to achieve carbon neutral or ‘net zero’ status within the next couple of decades.
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Offering staff a salary sacrifice car scheme with an emphasis on EVs is a practical and cost-effective way to support these goals, while also providing an attractive employee benefit.
According to figures from the British Vehicle Rental and Leasing Association, the number of vehicles leased via salary sacrifice grew by 68% year on year between 2022 and 2023, and almost 90% of those were electric or hybrid.
Encouraging employees to opt for EVs is also a sensible long-term option.
Last year, former prime minister Rishi Sunak announced that a proposed ban on petrol and diesel cars and vans would be pushed back until 2035, but the Labour party has previously pledged to reinstate the original 2030 target.
Similarly, low emissions zones such as ULEZ in London are being introduced in different parts of the UK, providing an incentive for workers who use a car to commute to switch to an electric or hybrid vehicle to avoid being charged within those zones. Electric car drivers do not currently have to pay for road tax either, although this will change in 2025.
Including electric or hybrid vehicle allowances or leasing options within a company benefits package is good for the planet and a win-win financially for employers and their staff. Employees who have begun paying into an electric car scheme could feel greater loyalty to their employer if they feel they could not access such a benefit at a competitor, so an EV plan could also form part of an organisation’s attraction and retention strategy.
How big is the EV market?
In January 2024, Britain registered its millionth EV, according to the Society of Motor Manufacturers and Traders (SMMT). Fully battery electric vehicles occupy around 13.1% of the market, up by a fifth compared to 2023, the organisation estimates. Fleet and business demand for EVs grew strongly at the start of 2024, up by more than 41% in January alone, while private registrations are down. According to the SMMT’s forecast, 414,000 new BEVs are expected to hit UK roads in 2024.
Why should we offer a salary sacrifice car scheme?
Employers looking to achieve their environmental, social and governmental (ESG) goals could find that an EV salary sacrifice scheme fits in well with their strategy. By offering such a scheme, organisations can reduce the carbon footprint of employees’ commutes.
Research from Mercer in 2022 found that employee activism is a key driver of achieving these goals, so the opportunity to run a ‘greener’ vehicle will be attractive to staff, particularly those from younger generations, who tend to be more likely to choose an employer based on their environmental credentials.
It can also be a more affordable option than a traditional car scheme. According to car leasing company Tusker, drivers using its salary sacrifice scheme saved more than £320 a month in 2023. With many employees still struggling with the cost-of-living crisis, an EV salary sacrifice scheme could help to drive down their monthly outgoings.
For employees, it also offers access to brand-new cars, saving them time looking at the used car market or sourcing an alternative financing scheme. A newer car will generally prove more relatable and they can tailor specifications to suit them. Many leasing schemes operate on a “just add fuel” basis, so this can be a very easy option for staff.
How does a salary sacrifice car scheme work?
A salary sacrifice car scheme is an agreement to reduce an employee’s overall wage entitlement in return for a ‘benefit in kind’ (BIK) – a car. An employee pays less tax and national insurance (NI) on a reduced salary, while the employer also pays lower NI contributions.
Employees who receive a BIK are charged tax on this benefit, but this may well be less than what they would have paid on a higher salary, so they make a tax saving. Rates of tax on EV benefits in kind are lower than those for petrol and diesel vehicles (around 3% versus more than 20%) as the government is keen to encourage adoption.
Employers may already be using salary sacrifice schemes for other employee benefits such as pension contributions or cycle-to-work schemes. The usual considerations apply: pay after salary sacrifice (across all schemes) cannot fall below the national minimum wage (NMW).
Salary sacrifice car scheme savings
As of 6 April 2024, when NI fell to 8%, employers could save £1,365 annually on employer NI contributions if they offer a car worth £50,000 to a higher-rate taxpayer.
They can make even greater savings on schemes for employees earning at the 20% tax rate – more than £3,600 annually on a car worth £36,440.
Adding a salary sacrifice car scheme to existing benefits
As with any other salary sacrifice options on offer as part of a wider benefits package, make sure to set out what is and is not included in the scheme. It is important to ensure that employees’ pay does not fall below the NMW after salary sacrifice deductions.
From an administrative perspective, a leasing scheme simply means there is an agreement between the employer and the provider of the scheme, rather than between the employee and provider. However, it might be worth communicating to employees that there will still be running costs such as servicing and insurance that they must cover themselves. It should be possible to integrate the scheme into an existing benefits portal and single-sign-on.
An employer could also use a salary sacrifice car scheme as an incentive in conjunction with other policies. For example, if an employee chooses to go on parental leave, it could consider whether employees continue to pay for their vehicle or whether it might cover these payments during this time as a show of loyalty.
What’s the difference between salary sacrifice and a car allowance?
There are two ways an employer can offer their staff a company car – a car allowance or a salary sacrifice car scheme. With a company car allowance, the company adds a lump sum to the employee’s salary to help them buy or lease a car, and/or to cover the costs of running it. This means the employee is responsible for finding and buying or leasing the car themselves and must cover the costs of maintenance and insurance.
Car allowance is a taxable benefit that gets taxed at the same rate as someone’s salary. However, it is not liable for BIK tax in the same way as a salary sacrifice scheme. Under a salary sacrifice scheme, the company leases the vehicle on behalf of the employee and the employee gives up part of their salary in exchange. The cost of the vehicle is taken out before tax and NI are applied, so both employers and employees end up paying less. However, the employee will need to return the car when they leave the company.
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