Salary sacrifice schemes: How can electric car drivers benefit?

They’re a cost-effective way to drive a new car, and low tax rates for EVs make them attractive for drivers looking to save money. 

This guide to salary sacrifice explains how these schemes work, what the benefits are – most notably for EV drivers – and how much you could save. It also examines the benefits for employers, along with downsides to such incentives.

An employee on a salary sacrifice scheme (sometimes referred to as a SalSac) exchanges part of their gross (i.e., pre-tax) salary for a non-cash benefit offered by their employer. This could be used for leasing an electric car, for example.  

Other common salary sacrifice schemes where money is exchanged for non-cash benefits include childcare vouchers, cycle-to-work arrangements to fund bicycles and cycling safety equipment, or indeed pension fund payments.

An overview of how salary sacrifice schemes work – including those for electric cars – can be found on the GOV.UK website. 

• Electric car leasing explained – EV financing vs buying
• 2035 ban – is it worth buying an electric car now?
• Breakdown cover for electric and hybrid cars 

There are numerous benefits for employees who take advantage of salary sacrifice schemes.

Tax savings are a big draw, because the monthly leasing for a car is deducted from the employee’s gross salary.

This means savings can be made on income tax and National Insurance, as well as VAT. 

Income tax – employees are taxed on their income, depending on how much they earn. However, as some of your earnings are deducted by a salary sacrifice scheme, your total amount of income decreases, meaning your income tax also reduces.

National Insurance (NI) – a type of tax all employees pay for state benefits including health, pensions and social care, the amount of NI you pay is calculated based on how much you earn. Both employees and employers make NI contributions. In salary sacrifice schemes, therefore, both sides of contribution make savings. For an employee, the less salary they earn (if some is sacrificed), the less NI they will pay. Equally, employers’ NI contributions are also reduced.

Value-Added Tax (VAT) – VAT is a form of tax added to nearly all consumer goods and services. Currently rated at 20 percent, VAT has to be paid if you purchase or lease an EV. When you are part of an EV salary sacrifice scheme, though, the employer pays the VAT – 10 percent of which can then be claimed back from the UK government.

Other benefits include the fact that employees can drive a brand new car with no further obligations at the end of the lease period (there is no ‘balloon payment’, as with a typical PCP finance deal, or any requirement to swap into another lease car, for example).  

Aside from salary sacrifice schemes, electric cars offer further savings for employees in terms of Benefit-In-Kind (BIK) tax and Vehicle Excise Duty (VED), otherwise known as road tax. As they have zero tailpipe emissions, EVs currently fall into the lowest available BIK rate.

This is currently just two percent from now until 2025. Compare that to non-hybrid petrol or diesel cars, which generally attract a rate of around 25 percent. Additionally, ‘fuel’ costs – battery recharging in other words – are likely to be lower, too.

Factor in that EVs are easier to drive than traditional combustion-engined cars, and more environmentally friendly at a local level, and the case for making the switch seems a strong one. 

• Should I get a hybrid, plug-in hybrid, or electric car?
• 30 quick money-saving tips – how to save money as a driver

There are benefits of an EV salary sacrifice scheme for employers as well. These include:

• Fully insured and maintained company cars with all in-life services (replacement tyres, for example) included
• Better employee engagement and retention
• Employee car leasing process and interaction is managed by the leasing company
• Salary sacrifice schemes complement other existing employee benefits
• NI contribution savings
• Salary sacrifice schemes are HMRC and VAT compliant
• Reduced fuel costs and no upfront costs

There is also the improved corporate image that comes with a fleet of zero-emissions electric cars. 

If there is a downside, it’s the obligation to pay VAT on the leased car, although 10 percent of this can be claimed back from the government. Savings in National Insurance contributions also help to mitigate this. 

Example 1: Tesla Model 3

If you were a manager earning £50,000 a year, leasing a Tesla Model 3 RWD through a standard lease agreement over 48 months and driving 10,000 miles a year, you could potentially save £139 a month if you leased the car through a salary sacrifice scheme.*

Let’s break down and compare the costs of a standard lease agreement with a salary sacrifice scheme.

Standard lease agreement

Your gross monthly salary would be £4,167, and you would pay £624 per month in income tax, along with £443 in National Insurance. Your monthly take-home pay (otherwise known as your monthly net salary) would be £3,100. 

The current RAC Leasing price for a Tesla Model 3 RWD is around £653. Under the agreement, this would be paid out of your net monthly salary of £3,100. 

After tax has been paid from your net monthly salary, and after you have paid the leasing fee, you would have £2,447 left.

Salary sacrifice scheme

Using an EV salary sacrifice scheme, with a gross monthly salary of £4,167 and a gross salary sacrifice of £544 (the leasing cost of £653 minus the VAT), your gross monthly salary would reduce from £4,167 to £3,623.  

You would then be taxed on this income, and pay £624 of income tax and £413 of National Insurance. Your net monthly salary would then be £2,586.

Using a salary sacrifice scheme rather than a standard lease agreement, therefore, you could potentially save £139 per month.

Example 2: Volkswagen ID.3

If you were an office worker earning £35,000 per year, leasing a Volkswagen ID.3 Life Pro Performance 58kWh through a standard lease agreement over 48 months and driving 10,000 miles a year, you could potentially save £87 a month if you leased the car through a salary sacrifice scheme.* 

Standard lease agreement

Your gross monthly salary would be £2,917, and you would pay £374 per month in income tax, along with £248 in National Insurance. Your monthly take-home pay (otherwise known as your net monthly salary) would be £2,295. 

The leasing price for a Volkswagen ID.3 58kWh is around £520. Under the agreement, this would be paid out of your net monthly salary of £2,295. 

After tax has been paid from your net monthly salary, and after you have paid the leasing fee, you would have £1,775 left.

Salary sacrifice scheme

Using an EV salary sacrifice scheme, with a gross monthly salary of £2,917, and with a gross salary sacrifice of £433 (the leasing cost of £520 minus the VAT), your gross monthly salary would reduce from £2,917 to £2,484.  

You would then be taxed on this income, and pay £374 of income tax and £248 of National Insurance. Your net monthly salary would thus be £1,862.

Using a salary sacrifice scheme rather than a standard lease agreement, you could potentially save £87 per month.

• How much does it cost to charge an electric car?
• The costs of running an electric car
• Electric car charging – how it works and how much it costs

For an employee, a salary sacrifice scheme has few downsides. It could save you a significant amount of money each month.

However, that doesn’t make it the most affordable way to access an EV. Buying a used car outright is still likely to be cheaper overall. Also, leasing a car means you will never end up owning it – so it could also prove more expensive for those who are happy to keep a car long-term.

Employees of companies that run a salary sacrifice scheme should definitely investigate how much they could potentially save – particularly by choosing an EV. Find out more by visiting our electric car leasing guide.