How salary sacrifice can save you money on your new electric car

John Evans

June 3, 2024 at 7:48 AM·4 min read

Despite generous sales incentives, many electric cars are more expensive than their petrol equivalents. But a long-established workplace scheme called salary sacrifice is making them more affordable.

With this, an employee agrees to deduct a portion of their gross or pre-tax salary each month to cover the cost of a benefit or item provided by their employer. In the case of an EV, this arrangement can save an employee up to 60% of the cost of funding the vehicle themselves from their taxed income.

At first, companies were slow to offer EVs on salary sacrifice but according to a recent industry survey, more than a third of companies are now doing so.

What is salary sacrifice?

It as an arrangement between an employee and their employer where the former agrees to give up or 'sacrifice' a proportion of their gross, or pre-tax salary, in exchange for a non-cash benefit selected, approved and offered by the employer to the employee.

Where it is offered by an employer, salary sacrifice also allows a company employee to lease a new car partly out of their gross salary. For the employee, the benefit is a new car at significantly less cost than one they could source and finance themselves out of their net pay, while for the employer it is being able to offer an additional retention and recruitment incentive to employees, although if the scheme reduces an employee's salary below the minimum wage, it cannot be offered.

How is salary sacrifice calculated?

On a car lease costing £600 per month (including maintenance, tyres and insurance), for example, an employee taxed at 40% pays £240 in income tax, an amount which is then deducted from the lease charge, meaning the car actually costs them £360 from their take-home salary.

Are there any extra costs with salary sacrifice?

Although the employee is paying the monthly lease charge on the car, it is actually provided by their employer via the leasing company supplying it. For this reason, it attracts benefit-in-kind tax since the Inland Revenue regards the vehicle as a taxable perk. However, the attractive thing about electric cars, and why they are so popular on salary sacrifice, is that their tax rate is very low.

How is benefit-in-kind tax calculated?

The tax is based on a combination of the car’s list price including VAT and extras (together called the P11D value), multiplied by the vehicle's official CO2 emissions expressed as a percentage and known as the BIK rate. The result, multiplied by the employee's personal tax band, is the amount of tax they must pay for having the car.

In the 2019/20 tax year, the lowest BIK rate was 16%, applied to cars emitting 0g/km – in other words, EVs. However, in 2020/21, the BIK rate for EVs was reduced to just 2%, a move that slashed the tax bill for employees driving them.

This rate still applies and will do so until 2024/25, after which it will rise by 1% increments to 5% in 2027/28. In comparison, the lowest BIK rate on pure-combustion cars (as distinct from hybrids) is 15% and will rise to 18% in the same period.

You can use our company car tax calculator to figure it out for yourself.

What are the benefits of salary sacrifice?

For employees, it's being able to have a new EV at significantly less cost than a new one they could source and finance themselves.

For employers, it’s being able to offer an additional retention and recruitment incentive although if the scheme reduces an employee’s salary below the minimum wage, it cannot be offered.

What are the downsides of salary sacrifice?

Many employers still do not offer EVs on salary sacrifice. A car on salary sacrifice is not free; there is still a monthly lease to pay typically over two or three years plus a small amount of benefit-in-kind tax. The reduction in the employee's gross salary means they and their employer pay less towards their pension and they may also find it harder to borrow money or get a mortgage.

The employee must return the car at the end of the lease period (some providers allow you to buy it) and there is a risk of additional costs should it have exceeded the agreed mileage or be in worse condition than agreed wear and tear limits. The employee can only choose from an approved list of cars agreed between the employer and the leasing company.

Electric car salary sacrifice example

MG 4 Long Range

P11D value: £29,985

Private lease cost including insurance: £520

20% tax payer

Gross sacrifice: £520

Net sacrifice after income tax and NI contributions: £364

40% tax payer