Once employees have exhausted their dreams of driving a new, high-tech electric car and get down to the details of salary sacrifice schemes, costs will loom large in their thinking. But there’s plenty of good savings for them – and for their employers.
Employers will be particularly keen to learn how much it costs to offer their staff this benefit. More than half of employers now offer salary sacrifice schemes for EVs, partly motivated by the effect of such schemes on retention, net zero but also the fact that it doesn’t cost them anything at the moment. It seems that there are only positives for firms offering the benefit.
As Andy Bruce, CEO of Glasgow-based leasing and fleet management specialist Fleet Alliance, says: “With a salary sacrifice car scheme, instead of salary being swallowed up by taxes and national insurance, employees sacrifice some of their earnings to pay for a new car.
“And if that new car is electric, the tax advantages are considerable because of the rate of company car tax payable by employees on EVs is just 2% in the current tax year and only rising to 5% by 2028. Compare that with rates as high as 37% for the most polluting diesel.”
Tax benefits
There is no indication, at the time of writing, that HMRC will be instructed to change legislation that would affect salary sacrifice arrangements for zero-emission cars.
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Employees pay benefit in kind (BiK) tax on benefits they get from their employer on top of their salary. HMRC treats the benefit separately from staff’s salary, which means they pay the tax before it arrives in their bank account. Any driver who uses a company car for personal use pays BiK tax out of their monthly wage.
BiK tax is calculated based on two things: the car’s CO2 emissions and the car’s P11D value. The P11D value is the list price of the car, including VAT, combined with any delivery charges, but it doesn’t include the car’s first registration fee or annual road tax.
The government has published the rates of BiK tax to be applied to company cars up to 5 April 2028. This indicates that the income tax, national insurance and VAT advantages available via salary sacrifice will continue for some years.
As Bruce says, the BiK rates range from 2% for zero and low-emission vehicles, all the way up to 37% for cars that create more pollution.
On 6 April 2022 the BiK rate for electric cars did increase from 1% to 2%, and is currently fixed at 2% until April 2025. From then it will increase by 1% every year until 2028.
Bruce details just how significant the savings can be for employees/drivers. He says: “Depending on a driver’s tax band this can generate savings of between 30-60% because the driver pays for the car partly with cash that would have instead gone to the taxman. This also cuts the Class 1A national insurance contributions bill for the employer, making such schemes even more appetising.”
Purchasing power
And there are additional benefits. “Among these is the salary sacrifice company’s purchasing power. At Fleet Alliance, we manage over 30,000 vehicles so we can source a better deal for all employees compared with one driver shopping around by themselves.
This fact, in addition to tax and NIC savings available, makes salary sacrifice a much cheaper option than a personal contract purchase (PCP) or personal lease, for example, says Bruce.
Unlike a PCP, there is no downpayment needed or even a credit check necessary with salary sacrifice, while early termination insurance can be built into the monthly rates. This offers employees peace of mind that, if they leave the business, they will not be left with a hefty bill for the remainder of the lease.
So, salary sacrifice car schemes produce savings in income tax, national insurance contributions and VAT while delivering a fully maintained and insured car, in return for a small monthly payment in company car tax.
“With the right programme in place, drivers get more for their money, and employers have a cost-efficient benefit that will enhance employee satisfaction and encourage new staff to join the company while retaining crucial talent,” adds Bruce.
‘They even installed a charger at no cost to me’
Tom Evans works for a professional services firm that leases EVs through Octopus Electric Vehicles. He drives a Tesla Y model on a three-year lease.
He says he had to state a yearly mileage estimate which affected the amount he’d pay. Since he doesn’t use the car for work purposes he selected 5,000 miles – a low figure – and pays £500 per month out of his net salary. “I reckon I’m saving about £300 a month doing this – it’s about £850 out of my gross salary, but I’m only having to pay £500 net.” Then there are other positives.
“I’m delighted with the whole arrangement, particularly the fact that car insurance is included. I’m a new driver in my early 30s and my previous vehicle was stolen. Can you imagine how much I’d have to pay in insurance if it wasn’t included in the deal? I reckon it would have been £6,000 insurance alone over the three years.”
Evans also found the free tyre replacement policy useful. “After only a couple of months someone damaged the tyres – an Elon Musk hater perhaps – but under the policy the car was taken away for a few hours and came back with new tyres. Brilliant. Tyres are now hugely expensive but I didn’t have to pay a penny.”
Another benefit was the installation of the charger. “Under the Octopus deal, they fit the charger for you up to the value of £1,000,” Evans says.
The potential savings from salary sacrifice are calculated according to the choice of car, the tax band of the driver and the monthly rental charged by the company supplying the salary sacrifice vehicle, says Bruce.
“In a typical example, if a lower-rate taxpayer selected an MG4 SE which would require a monthly gross salary sacrifice of £506, the net salary sacrifice would be just £382 after tax and NIC savings, giving a net monthly saving of £124.”
Salary sacrifice electric car savings
Bruce compares the costs of electric to non-electric vehicles to illustrate the cost benefits. A petrol-powered Audi A3 saloon costing £35,570 and emitting 132g/km of CO2 falls into the 31% tax band based on its emissions.
He explains: “That means a driver pays tax at his or her standard rate on 31% of the car’s taxable value of £35,570, which equates to £11,027. As a result, a 20% taxpayer incurs a £2,205 annual tax bill and double that for a higher-rate taxpayer.
“However, a Tesla Model 3 saloon costing £42,935 would have a taxable value based on only 2% of its price, which comes to £859. Therefore, a 20% taxpayer would pay just £172 annually, £2,033 less each year than the Audi.”
Over a four-year replacement cycle, the tax savings for the Tesla driver totals thousands of pounds, which Bruce says is plenty of incentive to consider switching to an EV.
For employees lower down the scale and with less available cash to sacrifice, let’s look at a Vauxhall Corsa hatchback electric and petrol versions – which have similar power outputs.
The petrol Corsa will cost a 20% taxpayer £1,434 a year in BIK tax, while the electric Corsa will cost the same taxpayer just £136 a year, again making the electric car salary sacrifice a highly valuable option for employees, Bruce says.
In the first half of 2024, 42% of Fleet Alliance vehicle orders have been battery electric vehicles (BEVs) with plug-in hybrids (PHEVs) comprising 35%, the highest market share for both model types to date as more employees have seen the cost-savings potential and switched to electric and hybrid models.
In terms of popular models, the Tesla’s Model 3 tops the charts with its Model Y stablemate in second place. “And the budget-oriented MG4 has been a revelation claiming third place,” says Bruce.
He says Fleet Alliance has plans to completely electrify its 30,000-strong managed fleet by 2030 and adds: “There has never been a better time for organisations who want to provide a wider range of benefits for their members of staff to take advantage of the salary sacrifice benefits that exist on electric cars.”
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