How Salary Sacrifice Makes Electric Cars More Affordable
Electric cars have long been considered more expensive than their petrol counterparts, but a workplace scheme called salary sacrifice is changing that. Salary sacrifice is an arrangement where an employee agrees to deduct a portion of their pre-tax salary each month to cover the cost of a benefit provided by their employer. In the case of electric vehicles (EVs), this arrangement can save an employee up to 60% of the cost of funding the vehicle themselves from their taxed income.
Initially, companies were slow to offer EVs on salary sacrifice. However, according to a recent industry survey, more than a third of companies are now providing this option to their employees. This is great news for both employees and employers.
For employees, salary sacrifice allows them to lease a new car out of their gross salary, resulting in a new EV at a significantly lower cost compared to financing it themselves out of their net pay. It’s a cost-effective way to access an electric vehicle and enjoy the benefits of driving an environmentally friendly car.
For employers, offering EVs on salary sacrifice is an additional retention and recruitment incentive. It shows that the company is committed to sustainability and provides employees with an attractive benefit package. However, it’s important to note that if the scheme reduces an employee’s salary below the minimum wage, it cannot be offered.
But how is the cost of salary sacrifice calculated? Let’s take an example of a car lease costing £600 per month. An employee taxed at 40% would pay £240 in income tax, which is then deducted from the lease charge. As a result, the employee only pays £360 from their take-home salary for the car.
One potential concern with salary sacrifice is the additional benefit-in-kind (BIK) tax. Since the car is provided by the employer via the leasing company, it is considered a taxable perk. However, electric cars have a low BIK rate, making them even more attractive for salary sacrifice. In the 2019/20 tax year, the BIK rate for EVs was just 2%, compared to 15% for pure-combustion cars. This rate will remain until 2024/25, after which it will gradually rise to 5% in 2027/28.
There are several benefits to salary sacrifice for both employees and employers. Employees can enjoy the affordability of a new EV, while employers can provide an enticing incentive to attract and retain talent. However, there are also downsides to consider. The reduction in gross salary means employees and employers contribute less towards pensions, and it may affect their ability to borrow money or get a mortgage. Additionally, employees must return the car at the end of the lease, and there may be additional costs if the car exceeds the agreed mileage or is in worse condition than agreed wear and tear limits. Employees can only choose from an approved list of cars agreed upon by the employer and the leasing company.
In conclusion, salary sacrifice is a compelling option for making electric cars more affordable. It allows employees to access new EVs at a significantly lower cost than financing it themselves, while employers can offer an attractive benefit package. With the low BIK rates for electric cars, salary sacrifice is a win-win for both parties. However, it’s important to weigh the pros and cons before committing to this scheme.
