Mitigating the Effect of Employers National Insurance Increase by Providing Electric Cars to Employees via Salary Sacrifice

On 30^th October 2024, the Autumn Budget was announced. This included the daunting prospect for SME business owners of Employers National Insurance rises. Employers can take steps to mitigate the increase in costs, and one such method involves offering employees the benefit of leasing an electric car through salary sacrifice.  

Re-cap on the increase to Employers National Insurance

As a brief summary, from April 2025, the Employers National Insurance rate will go up from 13.8% to 15%. There is also a reduction of the threshold at which this tax is payable, which is going down to £5,000 from £9,100. The only relief being offered is the increase in Employment Allowance from £5,000 to £10,500. For more detail on the effects of this, and ideas on how to generally mitigate against the rise, please read Jason Maunick’s informative blog that was published in November 2024.  https://perrysaccountants.co.uk/news/employers-national-insurance-increase

Mitigation through providing electric cars to employees

When an employer provides an electric car to an employee through a salary sacrifice scheme, the employee has effectively agreed to give up or “sacrifice” a portion of their salary, in order to have access to the benefit of the car. This therefore results in a lower taxable income for the employee and will lead to a reduction in their income tax and national insurance, and of course a reduction in Employers National Insurance. Therefore, along with the benefit for the employer, the tax benefits for the employee effectively reduces the overall cost of the vehicle.

Practicalities of how this works for employer and employee

An employer leases a new electric car for a set period, for example two years, and gives this benefit to the employee. The employee pays for the lease directly by having the lease payment deducted from their pay, before income tax and national insurance deductions are applied. Employers typically work with car leasing companies to provide the vehicles. All terms of the agreement, including duration and the type of vehicle, are predefined and agreed by the employee before the agreement commences.

Considerations

Company cars will, of course, be classed as a benefit in kind. Therefore, a consideration is that class 1A national insurance will be due by employers on the percentage of the list price of vehicles. For fully electric vehicles, this is currently 2% of the list price in 2024-25 and rises to 3% in 2025-26. As an example, the total benefit to an employee who has a company car with a list price of £50,000 will be £1,500 in 2025-26. The employee will pay income tax on this amount, and the employer’s class 1A national insurance will be £225, which is 15% of the benefit. Another consideration for employers is the need for them to ensure that the employee is an appropriate candidate for the salary sacrifice scheme, as it is important the employee does not have their salary reduced below the national minimum wage level after the part of their salary has been sacrificed.

In conclusion, providing care is taken to ensure conditions are appropriate, salary sacrifice schemes on electric cars can be an effective way to provide a tax efficient option for an employee to have use of an electric car, and for an employer to mitigate the increase in Employers National Insurance rises.