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With the ban on new petrol and diesel cars in 2030 fast approaching, it’s essential to understand how to get an electric car in the most cost-effective way.
Salary sacrifice is one of the best ways to get an electric car more affordably, especially when new electric vehicles are still expensive compared to new gasoline and diesel cars.
And despite rumors to the contrary, the salary sacrifice was not included in the fall budget.
This is not surprising considering their popularity: research has found that the wage sacrifice of electric vehicles has increased by 68 percent year over year.
So how can you use this to your advantage to get an electric vehicle through an employer benefit plan?
What is salary sacrifice?
Electric vehicle salary sacrifice is a formal, tax-advantaged agreement between an employer and employee, allowing employees to give up a portion of their salary for a non-monetary benefit (in this case, an electric car).
This is a formal, tax-advantaged agreement between an employer and employee that allows employees to give up a portion of their salary in exchange for a non-monetary benefit (in this case, an electric car).
As an employee, you benefit because the part of the salary you have given up for your car is not subject to income tax or NICs, so your taxable salary is reduced.
How does it work?
You rent the electric vehicle from your employer, who rents it to a third-party company, and your electric vehicle can be for business or personal use. The amount it costs to lease your car each month is deducted from your pay before taxes.
If you sign up for an EV salary plan, you’ll choose a car from a list of vehicles approved by your employer, based on your budget, needs and wants.
You rent the electric vehicle from your employer, who rents it to a third-party company, and your electric vehicle can be for business or personal use.
The amount it costs to lease your car each month is deducted from your pay before taxes. Normally the plans last between two and four years.
As long as you are over 18 and do not have a driver’s license without too many points, you should be eligible.
How does it help you get an electric car for less?
Salary sacrifice means your taxable income is reduced and usually also includes servicing, maintenance and insurance for your electric vehicle.
By paying less income tax and NI contributions, your taxable income has been reduced. Therefore, purchasing an electric car at the sacrifice of salary represents a huge cost saving, typically between 30 and 60 percent compared to leasing.
Another great benefit of salary sacrifice is that inspection, maintenance and insurance are usually included, so in the case of an electric vehicle you only pay for charging.
As many offices also offer charging points at work, you may even be able to charge them for free.
What tax do you pay if you rent a car through salary sacrifice?
Currently, benefits in kind tax (BIK) is paid for electric cars.
BIK is a tax on the benefits you receive from your employer in addition to your salary.
It is increasing at a rate of 1 percent annually. It is currently set at 2 percent for low and zero emission vehicles (EVs), but by 2027/2028 the BIK will be 5 percent.
In the case of gasoline and diesel vehicles, which are highly polluting, the BIK can reach up to 37 percent.
Low BIK rates are a huge subsidy and tax benefit for EVs and make them perfect for salary sacrifice schemes.
If you lease a Tesla Model Y that costs £500 a month and you fall into the 40 per cent tax bracket, you would pay £200 in tax on that £500, leaving you with £300. Effectively then your Tesla Model Y, which should cost you £500 to lease, is only costing you £300 through salary sacrifice.
If, for example, you decide to lease an electric vehicle for £500 a month after analyzing the options offered through your job salary sacrifice scheme, such as the new Tesla Model Y, then that is the amount that is deducted from your gross salary.
Let’s say you fall into the 40 per cent tax bracket, you would pay £200 in tax on that £500, leaving you with £300.
Effectively, then your Tesla Model Y, which should cost you £500 to lease, is only costing you £300.
And since you also don’t pay National Insurance on the £500, you’ll benefit from further savings.
The basic Tesla Model Y costs £46,990 and has 0g/km CO2 emissions, meaning the BIK tax is currently just 2 per cent. It is increasing by 1 per cent each year, so by 2025/26 it will be 3 per cent.
At the time of writing, £939.80 is taxable, which (if you are a 40 per cent taxpayer) will pay 40 per cent.
In a year, you’ll pay just £375.92 on BIK, or £31.33 a month.
Salary sacrifice in the current EV climate: the easiest way to switch?
Salary sacrifice is proving to be an increasingly popular way to purchase a new electric car.
The British Vehicle Rental and Leasing Association recorded that salary sacrifice leasing plans increased by 68 percent year-on-year (year-on-year) in the third quarter of 2023.
And 91 percent of cars with salary sacrifice in the first quarter of 2023 were fully electric.
A 2022 YouGov survey found that once employees fully understood the benefits of salary sacrifice, three-quarters (74 per cent) said they would like the scheme to be offered in their workplace.
In October 2024, electric vehicle wage sacrifice provider The Electric Car Scheme said it had experienced a significant overall growth of 160 percent due to demand for new and used electric vehicles through wage sacrifice.
And the availability of plans will increase.
In the final quarter of 2023, HR magazine found that more than two-thirds (68 percent) of small and medium-sized businesses (SMEs) were considering offering an EV pay sacrifice to employees, and more than half (56 percent) percent) planned to sacrifice the electric vehicle salary. implement it in the next 12 months.
With the Government recently reaffirming a ban on new petrol and diesel vehicles by 2030, drivers are becoming increasingly aware that they must make the switch to zero emissions.
Many are looking to employers to help them make this shift, as companies try to transition to a greener model and reduce their carbon footprint, as well as keep employees happy.
The electric car wage sacrifice offers people the chance to buy an electric car while saving money and with very little hassle – one of the reasons it is so popular.
Can you rent used electric vehicles by sacrificing salary?
Used electric vehicles are not available through all salary sacrifice providers; depends on the scheme
Theoretically yes, but in practice, because employers do not rent you the car themselves, but through a company dedicated to salary sacrifice, you will only be able to choose between the electric vehicles offered by the lessor with salary sacrifice.
However, this is usually a very wide range of electric vehicles, so you are unlikely to have any problems finding one for yourself.
Not all salary sacrifice providers offer used EV leasing (it’s on a plan-by-plan basis), so check your employer’s plan to find out.
Can the electric vehicle be purchased when the lease period ends?
Typically, as is the default with salary sacrifice plans, you can only return the car, but some plans may allow you to purchase the EV at its market value at the end of the deal.
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