Electric Car Salary Sacrifice Scheme

There’s no doubt that driving an electric vehicle is an eco-friendly alternative to petrol- and diesel-powered engines. However, did you know that you could be adding to the feel-good factor by reducing your tax payments too? Here, Perrys Chartered Accountants explains the electric vehicle salary sacrifice scheme and why it is beneficial for you and your employer.

What is the electric vehicle salary sacrifice scheme? 

In simple, useful terms, the electric salary sacrifice scheme is a low cost way to drive an electric car. An employee gives up part of their monthly gross salary to cover the lease payments, and then in turn pays less tax, leading to a tidy saving. This may sound a little complicated, but the scheme is quite a simple concept.

How does the electric vehicle salary sacrifice work?

In order to benefit from the electric vehicle salary sacrifice scheme, an employer will need to agree to set up or already have in place a scheme and run it through their payroll. It is important to note that employees won’t own the vehicle themselves but will instead be leasing it through their employer as a company car. Employees will use their gross income to finance the vehicle. Employees income tax and national insurance will be based on their remaining salary.

A point to note, HMRC considers the car a BIK (benefit in kind). An electric vehicle will be taxed according to the value of the benefit itself, which in this instance is the list price of the car. For battery operated electric vehicles, the tax is 2% for 2023/2024 and 2024/25 tax years (this isn’t currently set to increase until 2025/26). This makes it an incredibly low-cost way to own an electric vehicle.

There are other benefits too. For example, because employees are leasing the vehicle through their employer, they won’t need to pay a deposit or undergo any credit checks. Electric vehicles are also exempt from road tax – making it an extremely cost-effective way to drive a new vehicle.

What sort of savings can be made on an electric vehicle salary sacrifice scheme?

For the employee, by leasing a vehicle in this way, they can save up to 50% on the monthly cost of owning a vehicle. This saving is generated through reductions in national insurance and income tax payments as well as other associated savings like maintenance and insurance.

As the employer is responsible for leasing the vehicle under salary sacrifice, they will pay the VAT on the vehicle instead of you. Employers can then reclaim up to 50% of this VAT back. Employers will also save on the reduced employer national insurance payments, which will be lower due to the salary sacrifice the employee is making. The more employees there are taking part, the more these savings will increase making it beneficial to both employers and their employees.

Employers interested in offering the electric vehicle salary sacrifice to their staff should speak to a qualified accountant. For more information about salary sacrifice, visit the government’s website.