Electric car salary sacrifice schemes.
4th August 2022
Mitchell Stock See profile
The salary sacrifice car scheme is a government scheme offering a financial incentive to both employers and employees to save money. This is achieved by employees taking up offers on heavily discounted electric car leases provided by the employer. An employee, provided they do not fall below National Minimum Wage, can sacrifice a portion of their gross pay (pay before tax) in exchange for access to the discounted electric car leases.
The salary sacrifice scheme has the rare pleasure of benefitting both employer and employee.
Employer Benefit Overview:
- Class 1A National insurance saving on electric car benefit in kind
- VAT saving with business able to claim back 50% of VAT on the lease (if VAT registered)
- Class 1 National Insurance saving on the sacrificed salary
- Improved reputation by promoting greener practices helping with employee recruitment and retention
Employee Benefit Overview:
- Income Tax saving on the salary sacrifice
- Pay only 2% on benefits in kind tax in comparison to 23% for a standard combustion engine vehicle
- Enjoy cheaper running costs for a car when switching to an electric vehicle with electric cars being 66% cheaper per mile than their petrol counterparts
- Access to brand new environmentally friendly vehicles at a fraction of the price
In a world where Class 1A National Insurance rates have increased by 1.25% to 13.25% and inflation constantly pushing up prices, it is vital to find any cost savings available to a business. As electric vehicles only attract a 2% car benefit percentage (from the 2022/23 tax year) a cash saving can be had on NIC by replacing a more traditional combustion engine vehicle which is likely to track anywhere from 20% plus.
Salary sacrifice schemes remain popular due to their win-win nature for employers and employees. As the employee pays out of their gross salary the employer does not have to pay National Insurance on the amount sacrificed. Thus, resulting in a real cash saving, especially considering the increase of Secondary Class 1 National Insurance to 15.05% in the 2022/23 tax year.
This scheme is a fantastic opportunity for businesses to become pro-active and present in the latest push for a greener future. Not only do businesses make the tax savings outlined above, but they also attract new staff who are looking for to work for a company with a cleaner social image. It also means it is far easier to meet any environmental quotas with any mileage in a leased electric vehicle eligible towards green quotas.
There are no expensive set up costs to begin this scheme and there are already many providers who can assist with the rollout of this scheme. A business of any size can enter the scheme and offer to their employees, while bigger business looking to invest in a ‘green fleet’ will potentially be able to claim a higher level of VAT back.
In short, yes. As the electric vehicle lease is made out of gross pay, the employee is making an Income Tax saving on top of the already discounted lease hire.
As stated above, the employee can make a benefit in kind tax saving due to the 2% car benefit percentage. A sizeable difference to its combustion engine counterpart.
All employees will enjoy the privilege of being able to use the electric car for personal use as well. The salary sacrifice scheme offers employees the chance to drive high end new cars that they would perhaps ordinarily be unable to afford.
Not only do employees have access to newer model cars, they can also make extra savings on top of this. EDF Energy posits that day to day running costs are significantly cheaper for an electric car. Estimating that on average it is a third of the cost per mile.
With the additional perks of being able to drive through clean air zones at no extra cost as well as having no road tax to pay.
Any employee can drive away happily knowing that they have not only done their part for the environment but also saved their hard-earned money doing it.
HMRC have announced a lower rate of tax for electric cars until 2025, so it is imperative to act as soon as possible to take full advantage of the tax savings the government are offering to push businesses towards a greener future.
By adopting this scheme early any business is getting ahead of the curve in an ever growing environmentally conscious world. An additional benefit in the long list of benefits is the link to employee recruitment and retention, with the newer workforce generation valuing strides towards higher social responsibility from their companies. Early adopters can have this practice in place to capitalise on this and play a key role in this exciting future.