When it comes to understanding and implementing the electric vehicle salary sacrifice scheme, you might come across a few issues:
- The salary sacrifice scheme is relatively new and there are regular updates, which makes it hard to know what does and doesn’t apply today.
- There is a lot of information on the scheme, but it can be hard to understand what applies to you as an employee or employer.
- It’s hard to compare between electric company car salary sacrifice schemes because each one will be offering something different.
We’ve put together a guide that will breakdown some of the terminology and frequently asked questions so you can learn more about leasing an EV from loveelectric through our salary sacrifice scheme.
Note: are you an employer or employee interested in implementing an electric car scheme for your company? With Loveelectric, employers can offer the electric car salary sacrifice scheme as an employee benefit at no extra cost. Get set up now.
The key points:
- Salary sacrifice means an amount is deducted from your gross salary
- There are significant tax savings with salary sacrifice
- The BIK rate is super low on EVs
- Road tax does not apply to EVs
What is salary sacrifice?
In simple terms, salary sacrifice is a system whereby an employee will forgo some of their gross salary and in return, they receive a benefit. You may already be familiar with other salary sacrifice schemes, for example things like cycle to work, pension or childcare schemes. In the case of loveelectric, we use salary sacrifice to help you get a more affordable electric vehicle. (The Government provides more detail on salary sacrifice here.)
How does salary sacrifice work for electric cars UK?
To get set up with the ev salary sacrifice scheme, the employer usually signs up to a regulated third party salary sacrifice scheme like loveelectric so employees can take advantage of the scheme.
Technically, an employer can run the scheme themselves, but it is complex since it sits at the intersection of employment law, tax regulations, financial services regulations and commercial law. For this reason, it’s advisable to use a Financial Conduct Authority (FCA) regulated firm which has development documentation that complies with all laws and regulations.
The employer must then be evaluated by the leasing company to assess its eligibility for the scheme. If they are eligible, the employer can then set up the scheme for their employees. Some schemes may charge a fee for this; with loveelectric, this is done at no additional cost. Employees must also be eligible to partake in the scheme. There are a few requirements that make employees eligible:
- They’re a permanent employee
- They’re earning above minimum wage (after the salary sacrifice)
- They don’t have claims or cat A convictions that are over 3 years old
- Have permanent UK residency
- Don’t have more than 6 points on their license
Once the scheme is set up, employees can then pick the car they’d like to use which will be delivered depending on the lead time.
Monthly payments will come out of the employee’s salary before tax, which the employer will arrange with their payroll provider or in-house finance team. Employees will simply receive a reduced salary every month in exchange for the electric car. Since these payments are taken before tax, the employee’s income tax and national insurance payments will be lower.
Since the car is for personal use, the electric salary sacrifice scheme will be required to pay Benefit in Kind tax. However, BIK tax is determined based on the CO2 level emissions from the vehicle — which means that for electric cars it’ll be very low. The current BIK is 2%, and is set to remain that until 2025. To compare, a diesel car’s BIK tax could be as much as 37%.
Agreements via the salary sacrifice scheme can range from 24 months to 48 months, and in the case of loveelectric, employees and employers are also protected in case of early termination. If an employee leaves after 3 months, they only pay a one time fee worth one month of their monthly rental. If the employer makes an employee redundant after six months, the employer pays a one-off fee equivalent to the value of the monthly rental. loveelectric also offers cover for maternity and paternity leave, for up to 12 months. Read more about our early termination policy here.
The entire monthly payment will include maintenance, insurance, tyres, servicing and road tax. There is no deposit required.
Can I use a salary sacrifice scheme to get an EV?
Absolutely! With the help of a salary sacrifice scheme, employees can lease an EV and therefore save a significant amount on the monthly cost - up to 50% in fact. The saving is generated through reductions in national insurance and income tax payments.
At loveelectric, we offer all-inclusive car leasing plans, which means insurance, servicing, maintenance and breakdown cover is included. Employers simply sign up to the service (it doesn’t cost a penny!) which gives employees access to salary sacrifice prices for the entire EV market. Not only is this a great benefit for everyone who is signed up to the loveelectric salary sacrifice scheme, it also helps keep our air clean and get UK carbon emissions down.
Once a company signs up to loveelectric, their employees can find an electric car quote they are happy with on the loveelectric app, and proceed to order the car. (Illustrative examples of quotes can be found on our website). When the order is approved and signed off, the monthly cost of the electric car will be deducted from the employees monthly gross salary (gross salary = salary before tax has been applied). This is their ‘salary sacrifice’.
Can I get a Tesla through salary sacrifice?
Yes! loveelectric has a diverse selection of EVs to choose from, including all of the Tesla models if that’s what you’re into. If you want to take a look at what we offer, check out our website.
Can I buy a car on salary sacrifice?
It is quite rare for salary sacrifice schemes to let you buy your car once your lease period is over. However, brand new electric cars are expensive which is why it often makes more sense to lease the car.
The main benefit of leasing an electric car is that there is no large up front cost associated with buying the car. All cars depreciate in value, the question is by how much.
With electric cars there is a risk that they could depreciate significantly over a 3 or 4 year period as battery technology continues to advance and new models enter the market. It’s more prudent to allow a leasing company to take the residual value risk rather than taking that risk as an individual.
As an employee, do you want a "balloon payment" and the hassle of selling the vehicle at the end of the lease agreement, or would you rather simply return the vehicle to the leasing company?
With loveelectric, there is no option to buy the car. Once your lease period is over, you hand the car back and can choose to get another delivered.
Do you pay tax on a salary sacrifice car?
No, employees won’t have to pay tax on any amount that is salary sacrificed to pay for the monthly lease cost.
Through salary sacrifice, employees reduce their taxable income and subsequently end up paying less in income tax and national insurance. If you’re unfamiliar with salary sacrifice, this may sound scary at first, as it may feel like you’re losing income. However, by doing this, employees actually end up saving money. The level of tax employees must pay is based on how much they earn - in essence the more you earn, the more you are taxed.
With a salary sacrifice, a small portion of the salary will go straight from the employees’ pay check into paying for the electric car, essentially going straight back to the employee in the form of a benefit. For example, if an employee’s net monthly pay is £1850 before salary sacrifice, they would take home £1650 after salary sacrifice, the EV is costing them £200 per month (which would otherwise have cost them around £400 a month).
Triple Saving: a Tax Breakdown
One of the key elements which makes loveelectric able to offer such affordable prices is the triple saving; loveelectric customers will save on VAT, income tax and national insurance contributions.
1. Value-Added Tax (VAT)
VAT is a consumer tax which is applied to almost all consumer goods and services and the current VAT rate is 20%. If you were purchasing or leasing an EV outright, you would pay VAT on the vehicle. However, under salary sacrifice, the employer is responsible for the lease and so the employer pays the VAT. However, the employer does not lose out either, as they can reclaim 10% of the VAT back from the government. They also make a saving from reduced employer national insurance payments, (you can read about this in the section below), which are lower due to the salary sacrifice.
2. Income tax
You may already be familiar with income tax but if you’re unsure of what it means, it is essentially a tax on your income. The amount of income tax that needs to be paid is based on how much you earn, and there are a couple of different tax bands you could be in (we recommend having a look at the HMRC website if you’re unsure which tax band you’re in). It also depends on where you live, as income tax varies based on where you are in the UK (Scotland has slightly different rules compared to the rest of the UK).
With salary sacrifice, you’d be forgoing a portion of your income in exchange for a benefit, (in this case, one of our many EVs) so this means that your income tax would, in turn, decrease.
3. National Insurance (NI)
NI is a form of tax which is used to pay for different kinds of benefits including health, social care and pensions. Similarly to income tax, NI is based on how much you earn and both employees and employers have to pay NI. If you want to learn more about how NI works, we recommend you look into it on the HMRC website.
Salary sacrifice is cost-effective for both employers and employees alike, because if you’re part of a salary sacrifice scheme, you save on national insurance contributions (NIC) on both sides. Similarly to income tax, the more an employee earns the more NIC the employee has to pay from their own salary, meaning that forgoing some of their salary may actually mean saving money. It also means the employer can save on NIC also, and these savings will increase the more employees take part in the salary sacrifice scheme. It’s a win-win situation!
What is Benefit in Kind (BIK) tax?
You may be thinking at this point that this all seems too good to be true, so what’s the catch? There really isn’t a catch, but we will explain a little more about Benefit in Kind (BIK) tax, which is a form of tax an employee has to pay for receiving a perk or benefit related to their employment, and this perk can be used during our outside of business hours.
All cars, including EV’s, have a certain level of BIK tax to be paid to HMRC. BIK is determined by taking a percentage of the cars list price (sometimes referred to as P11D value) which is taxable and this percentage amount of tax is based on the vehicles’ level of CO2 emissions. The higher the CO2 emissions are, the higher the tax is. Luckily, EV’s do not have any CO2 emission at all, which means that the BIK for EV’s is very low. As of writing this, the current percentage of BIK is 2% and it will remain at that percentage until 2025.
Can I get a salary sacrifice if I get an hourly wage (PAYE)?
Yes, however it is dependent on how much you earn. If the salary sacrifice deduction takes your ‘take home pay’ below minimum wage, you wouldn’t be eligible. However, there are a huge range of EVs at different price points, so hopefully there will be something to suit your budget.
Is There VED on EV’s?
No! Electric vehicles are exempt from Vehicle Excise Duty (VED) as of 2020. You may have seen it described elsewhere as EVs not having any ‘road tax’ or ‘car tax’. These terms all mean the same thing, although the official term for it is VED.
What is a salary sacrifice car scheme example?
Warren lives in England and is looking to get a Honda E and his salary is £26,000 a year, meaning that his monthly gross salary is £2,166.67. Warrens wants to drive electric and lease term of 48 months and anticipates the mileage to be around 5,000 miles every year.
Below are two options of leasing an electric car, one using loveelectric’s salary sacrifice scheme and one using a standard lease agreement.
• Standard Lease Agreement:
Prior to even thinking about the car that he wants to lease, Warrens’ monthly income would be taxed. Based on his level of income, he would have to pay £223.83 every month in income tax, as well as £164.32 in national insurance, meaning that Warrens’ take home pay each month (i.e. his monthly net salary) would be £1778.52.
Currently, the average leasing price (including VAT) for a Honda E comes out to £427 per month. With this agreement, Warren would pay using his net salary of £1778.52.
£1778.52 - £427 = £1351.52
This last number reflects how much Warren has left after his monthly salary has been taxed and after he has paid a monthly leasing fee for his Honda E.
There may also be additional fees in the form of broker fees.
• Lease Agreement With loveelectric:
If Warren instead went to loveelectric to get his Honda E, he would take his gross monthly salary of £2166.67 and make a gross sacrifice of £356 every month (this is £427 minus the VAT). This means that his monthly gross pay would change from £2166.67 to £1810.67 every month.
£2166.67 - £356 = £1810.67
Following this, Warren would then be taxed on this income, £152 in national insurance and £122 income tax, meaning that his net income would be £1537.
£1810.67- (£122 + £152) = £1537
This means that for every month Warren leases with loveelectric, rather than a standard leasing company, he saves £185.
You can read and find more examples here: Salary Sacrifice Electric Car Examples: How It Works In Practice
Does owning an electric car save you money?
If you want to see what you could save, try out our Find My eCar section on our website where you can input your annual mileage, contract length and salary to get an estimate of how much it would cost per month.
If you’re looking to increase your company’s benefits by offering your employees access to the best EVs on the market for the best price, click here to learn more about how you could get started today!
Last Updated: 13 June 2022
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