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In recent years, car salary sacrifice schemes have been gaining popularity across the UK. Many employers offer salary sacrifice schemes that enable their employees to get into an EV in a more tax-efficient way.
Here we explain how salary schemes work, their benefits and explore whether or not they’re right for you.
A salary sacrifice scheme (sometimes referred to as ‘sal sac’) for cars is an affordable way for employees to drive a car, giving them greater access to EVs. In effect, the schemes are business contract hire schemes for individuals between the agreement, the policy, the employer and the employee.
Similar to a contract hire scheme, the package comes insurance, MOT, servicing, breakdown cover, road fund licence, replacement tyres and routine maintenance all included.
Here’s the clever bit. Traditional company car leasing payments are taken from an employee’s net income after they have paid tax. With salary sacrifice however, the payments are taken from their gross income before tax. By sacrificing part of your gross salary, an employee will pay less tax than a traditional company car, therefore having more disposable income.
You do still have to pay company car tax when on salary sacrifice however.
The fixed monthly cost of leasing a car allows for greater planning, whilst all logistical aspects of the scheme are handled by the employer, making salary sacrifice a more convenient option for many.
Employees also gain access to new cars and electric vehicles, allowing them to drive an EV whilst avoiding any upfront costs.
Businesses benefit from providing greater benefits for their employees as it enables them to attract and retain highly skilled workers. A survey completed by Octopus found that 59% of employees are more likely to join or stay with an organisation if they offer a comprehensive benefits package.
Employers also face a reduction in their National Insurance contributions, allowing them, as well as their employees, to save on their costs.
There are few restrictions in joining a salary sacrifice scheme. As long as the reduction in income will not cause an employee’s salary to fall below the National Living Wage, anybody is entitled to join, provided it is offered by their employer. The government even encourages the scheme to increase the usage of electric and hybrid vehicles. There can sometimes be an age restriction on certain cars based on the insurance cost.
Most employers base pension calculations upon notional salaries, which is the amount of income received before salary sacrifices are made. However, some employers may choose to base pension contributions on an employee’s post-salary sacrifice, reducing the overall amount of money added to a pension.
If a pension is based on an employee’s final salary or average career salary, it can also result in a reduced pension payout. Be sure to speak to your employer to understand the specific rules of your pension scheme.
You can also consult a financial advisor to evaluate the effect of salary sacrifice on your pension and discuss ways to mitigate any negative effects.
*Total potential savings estimated to be £1,185. This is calculated using an average driving efficiency of 3.5 miles/kWh and annual mileage of 8,292 miles. Savings compares a smart (home) charging rate of £0.07 per kWh (May 2024 Ovo Anytime tariff) with a slow/fast rapid rate of £0.57 per kWh (ZapMap Price Index April 2024).
