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Electric Vehicle Salary Sacrifice: The Ultimate Guide (2022)

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There’s been a significant movement towards more environmentally friendly vehicles in recent years, and Next Green Car latest statistics show that there are now over 600,000 plug-in models in the UK (300,000 of which are pure electric).  While sales of petrol and diesel cars are declining, electric vehicle (EV) sales are beginning to climb rapidly. 2019 saw the biggest annual increase in EV sales, with more than 175,000 electric vehicles registered,  showing a growth of 66%.

A key reason for this increase in popularity of electric vehicles has been an increase in government incentives and legislation to encourage the adoption of EVs, meaning it’s easier than ever to go green.  With domestic transport having the largest share of UK greenhouse gas emissions of any sector across the economy, this can only be good news. With all this change, a new and more affordable model of EV ownership has emerged; leasing an electric vehicle via salary sacrifice, which can halve the monthly cost of motoring!

This post 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.

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.)

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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 lease 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.

How does tax affect salary sacrifice for electric cars?

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 great 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!

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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.

Source: www.fleetnews.co.uk

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.

Photo by Towfiqu barbhuiya on Unsplash

Is a salary sacrifice worth it?

Let’s use an example to really break it down. Say 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 £2166.67. Warrens wants a lease term of 48 months and anticipates the mileage to be around 5000 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.

If you’re curious how the tax rates are determined, we recommend using the HMRC website as well as the Money Savings Expert calculator.

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.

How much could I save?

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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