Salary Sacrifice: Frequently Asked Questions
In this guide, we’ve gathered a list of frequently asked questions around EV salary sacrifice schemes. Learn what it is and how it works here.
What is an EV salary sacrifice scheme?
Salary sacrifice enables employees to exchange some of their pre-tax salary for a choice of attractive benefits, such as childcare, pensions and health insurance, often at discounted rates that they usually wouldn’t be able to access as individuals. They’re an effective way to recruit, motivate and retain staff and extend some of the perks of company car schemes to other employees.
Following reforms to Operational Remuneration Agreements (OpRA) in 2017, salary sacrifice has become one of the most affordable ways to drive an electric or plug-in hybrid vehicle and an increasingly popular option for employers. According to the latest BVRLA quarterly leasing report, cars delivered to salary sacrifice agreements increased by 20.5% in the 12 months to Q3 2022, and long-term incentives are expected to fuel ongoing growth.
How does salary sacrifice work?
The process is simple. Employees choose a car from a list of options; their employer leases it on their behalf, then deducts the monthly rental cost (including road tax, insurance, maintenance, accident management and breakdown cover) from their pre-tax income. Provided the car emits 75g/km CO2 or less, they’ll be taxed on it as a Benefit-in-Kind and pay income tax and National Insurance contributions on what’s left of their salary.
Is EV salary sacrifice worth it for drivers?
Choosing a car on salary sacrifice enables drivers to access their employer’s buying power, and there are some attractive tax incentives for the cleanest vehicles (75g/km CO2 or less).
Employees pay Benefit-in-Kind at the same rate as their income tax band (usually 20% or 40%), and the car’s ‘taxable value’ – a percentage of the list (P11d) price which decreases for vehicles with the lowest CO2 emissions and (for models emitting 1-50g/km CO2) their electric range.
With ultra-low percentage bands for driving electric cars and plug-in hybrid vehicles, the taxable value is usually much lower than the salary given up. This means Benefit-in-Kind payments are lower than the income tax they would otherwise be paying, further improving affordability compared to leasing privately.
Why should employers offer EV salary sacrifice schemes?
Reforms in 2017 restricted tax incentives to vehicles emitting 75g/km CO2 or less, which heavily favours plug-ins. This has proved effective, with the latest BVRLA data showing that 94% of salary sacrifice deliveries are either plug-in hybrid or electric. Most (86%) are the latter.
Salary sacrifice provides a desirable alternative to cash allowances and grey fleet mileage while influencing drivers to choose the cleanest vehicles. It can avoid the administrative burden of ensuring private cars are adequately insured and maintained while cutting the cost and CO2 footprint of business trips.
For vehicles emitting 75g/km or less, employers’ Class 1A NICs are also based on the taxable value of the benefit instead of the amount of salary used to fund the monthly rental. This means they can also expect to reduce their NIC bill by offering salary sacrifices to employees.
What should employers consider when they launch a salary sacrifice scheme?
Salary sacrifice schemes are designed not to be an administrative burden, but there are some important details to bear in mind when setting them up:
- Who will run the scheme? Having a single point of contact for the leasing company can help ensure the scheme is managed properly and continues to fit the employer’s goals – for example, restricting choice lists to electric vehicles.
- How are you managing risk? Work with you supplier to identify and mitigate financial risks, such as early termination cover which covers monthly payments in case of long-term sick leave, redundancy, resignation or a reduction in salary.
- How will you integrate it alongside other schemes? Salary sacrifice can complement a traditional company car scheme, and some employees may be eligible for both. LeasePlan can help develop a driver portal that meets your business needs; either presenting both schemes together for easy comparison, or separating drivers based on their circumstances to avoid confusion.
Experienced fleet management services are vital. LeasePlan’s consultative approach can help businesses to understand how to best integrate electric vehicles into their fleet, while reducing costs and improving performance and driver safety.
How should you communicate the benefits to employees?
Buying or leasing a car is a significant life choice. Salary sacrifice schemes are an opportunity for a provider to influence and educate employees who may have never been exposed to company cars – or any other benefits-in-kind – before.
All communications need to be clear, explaining issues that might already be obvious to a veteran company car driver. This will ensure employees are educated, motivated and ready to make an informed decision on whether a salary sacrifice car is right for them.
Some employees will also be unfamiliar with electric and plug-in hybrid vehicles. Providing detailed guides and training can help them choose a car that meets their needs and navigate unfamiliar processes, such as fitting a home chargepoint, with confidence. This can help make electrification seem less daunting and improve uptake too.
Can everyone salary sacrifice a car?
Although salary sacrifice can be made available to all employees, deducting the monthly rental payments can’t take drivers’ remaining pre-tax income below the minimum wage threshold. This should be reflected in vehicle choice lists.
How many cars can you lease with EV salary sacrifice?
You can lease more than one car through a salary sacrifice scheme, as long as the combined monthly payments don’t result in your pre-tax income falling below the minimum wage. However, you can also insure family members to drive a salary sacrifice car.
Most employers will only let you lease one car through a salary sacrifice scheme. However, that car is available to use for private and business mileage and your family members can be insured to drive it too.
Do you own the car after EV salary sacrifice?
As salary sacrifice is a leasing product, not hire purchase, employees won’t own the car at the end of the contract. Instead, they can choose to exchange it for another brand new car, hand it back (subject to excess mileage and wear and tear charges) or re-finance the rest of the value and buy it outright.
What happens to a salary sacrifice car if the employee resigns?
This depends on the employer. The car will be returned to LeasePlan and, subject to fair wear and tear guidelines and early termination cover, there will be nothing further to pay.
How long will electric company car tax incentives last?
The company car tax bands used to calculate the vehicle’s taxable value are frozen until April 2025, and the Chancellor announced the following three years as part of the last Autumn Statement. This confirmed that incentives for low-CO2 vehicles will remain in place for the duration of a typical three or four-year lease.
Cars emitting less than 75g/km CO2, which includes all electric and most plug-in hybrid models, will get a 1% point rise each April from 2025. For battery-electric cars, this will increase from 2% in 2024/25 to 5% in 2027/28, compared to at least 26% for most petrol or diesel models.