Salary sacrifice for electric vehicles

For an employer, offering a salary sacrifice or optional remuneration arrangement can be an attractive incentive for employees and a tax efficient way of rewarding key individuals. For an employee, it can provide significant tax savings.   

Andie Field, Tim Bird, Cally Riley-Lowe and Emily Pearson explain.

Where an employer provides an electric vehicle salary sacrifice scheme the arrangement works as follows.

The employer will lease an electric vehicle on behalf of an employee.  The employee “sacrifices” a proportion of their salary to cover the monthly repayments for the vehicle.

As the monthly repayment costs are deducted from an employee’s gross pay, this gives two tax advantages:

• The employee does not pay income tax on the amount sacrificed, resulting in a tax saving at 20%, 40% or 45%, depending on their marginal rate of tax.
• The employee also does not pay Class 1 national insurance on the salary sacrificed, giving a further saving of 12% or 2%, depending on the level of their salary.  
• The employer does not pay Class 1 national insurance on the amount sacrificed, saving NIC at 13.8%.

The rules on optional remuneration arrangements are covered in a previous article: Salary Sacrifice and Optional Remuneration Arrangements.  

However, rules relating to optional remuneration arrangements do not apply to fully electric vehicles.  

The employee will have a benefit in kind in respect of the car.  The benefit is the list price of the car multiplied by a percentage determined by its CO2 emissions.  As the electric vehicle has no CO2 emissions, the percentage applied is currently 2%.  

The employee will therefore be taxed at their marginal rate on the taxable benefit, being 2% of the list price of the car.  The employer will pay Class 1A national insurance at 13.8% on the same amount.  

Example

This can be illustrated with an example.  

In this example the employer leases an electric car with a list price of £30,000.  Monthly repayments of £1,000 are made on behalf of the employee who has sacrificed an equivalent amount of salary. In this example, we have assumed that the employee is liable to tax at the higher rate.  

*The taxable benefit for 2023/24 is £30,000 x 2% = £600

As a result of the arrangement, the employer has a net national insurance saving of £1,573.20.  

The employee’s net pay will have reduced over the year by a total of £6,960 and they will also have tax to pay on the benefit in kind of £240.  

This remains a significant saving compared to paying £12,000 directly on lease payments.  

Other issues of which to be aware

However, while this can be a beneficial arrangement from a tax perspective, there are some potential issues to be aware of:

• The employer is ultimately responsible for the vehicle and for managing the salary sacrifice programme for its employees.  
• The employer will need to complete form P11D(b) each year to report the benefits in kind and issue form P11d to each employee with a benefit under the scheme.
• The employer would need to ensure that the net salary, after deduction of the amount sacrificed, did not reduce below the national minimum wage.  
• As the salary sacrifice reduces an employee’s gross income, this may also reduce other payments based on gross income, such as pension contributions, holiday pay or entitlement to state benefits.  It may also affect mortgage applications made by the employee.  

The use of an optional remuneration agreement for an electric vehicle is an example of how offering tax efficient benefits can benefit both the employer and the employee.  It can be part of a flexible and tax efficient remuneration package for new starters and existing staff.  

Contact us for advice and further information

If you are considering salary sacrifice type arrangements or looking at re-designing your benefit offering to your employees, please contact a member of the Employer Solutions team.