16 October 2020


Thanks to the low BIK rates on electric vehicles, salary sacrifice schemes are growing in popularity. But there are some key issues an employer needs to understand before setting up a scheme.

In the past few months, there has been increased interest from both employers and employees in salary sacrifice schemes through the provision of electric vehicles.

The concept of salary sacrifice – which has been around for some time – can lead to some significant savings, but its popularity is dependent on tax rates.

Harvey Perkins, Director at company car tax experts HRUX explains: “Salary sacrifice is where an employee gives up a contractual right to salary in return for a benefit. Prior to 2016 there were all sorts of sacrifices, but since then legislation was introduced to tax an employee on the amount of salary they’d given up, unless the sacrifice was for one of a small group of benefits, which includes pension contributions, bikes for work and a company car that emits 75g/km of CO2 or less.”

Salary sacrifice schemes work whereby the employer leases the car, with maintenance and insurance costs packaged in, and the employee sacrifices part of their salary before tax to pay for it. This means employers can save on national insurance contributions (NIC), while employees save on national insurance and income tax.

Sacrifice is only allowed for cars with CO2 emissions below 76g/km, discounting all but ultra low emission electric or part electric vehicles, while the introduction of new BIK tax rates for EVs created perfect conditions for salary sacrifice to make a return. Perkins adds: “If an employee wants an electric company car, on which the tax and employer’s National Insurance for 2020/21 is £zero (tax is based on 1% of list price in 2021/22 and 2% in 2022/23), they can elect to give up fully taxable and NICable pay.”

It’s not just pure electric cars which may work on salary sacrifice schemes either.

“You can make the maths work also for a plug-in electric hybrid but here it is likely to be less attractive as the tax charge is much higher in comparison to a full EV,” says Perkins. “Financially, salary sacrifice is a huge benefit, meaning that the employee is effectively paying for a car from their gross pay. The UK car leasing industry is very aware of this and are pushing schemes as hard as they can to larger corporates. As long as there is a supply of EVs there will be demand for salary sacrifice - but be wary of the maths and in particular the risks of unexpected costs.”

Seven key things about when implementing Salary Sacrifice

While Salary Sacrifice schemes can unlock savings through car provision for both the employer and employee, there are a number of areas that need exploring before setting one up. Harvey Perkins highlights the key issues an employer you may wish to consider:

  1. The amount the employee sacrifices should cover you against all the costs of operating a company car; so (if you lease) that’s rental (including the unrecoverable VAT), maintenance and insurance.
  2. Think also about unexpected costs like out of contract recharges and insurance excesses. If you can’t recover these amounts from the employee think about adding a little extra to the sacrifice to give you a provision. The big unexpected cost tends to be termination costs when employees leave. You can add Early Termination Insurance (ETI) into the sacrifice, but these policies can be expensive and not all terminations may be covered. Another option is to tell the employees they must pick up the bill if they leave through the scheme policy.
  3. There is often a fairly significant NIC saving for the employer and there’s normally a debate about whether that will be retained or used to reduce the employee sacrifice.
  4. The garden is not all rosy for electric cars. There are range and infrastructure issues and only limited cars available which are often in short supply.
  5. You don’t have to sacrifice for the whole cost of the car. If you have an employee who already gets a company car but wants an electric car, they could sacrifice the difference in wholelife cost (WLC) effectively to ‘trade-up’.
  6. There are 100% First Year Allowances for businesses that buy electric cars, so don’t automatically think that leasing is best (as it often is for conventional cars).
  7. Keep an eye on National Minimum Wage threshold issues. While the level of employees choosing EVs might not seem close to the threshold, combinations of the amount sacrificed, other benefits such as pensions and issues such as the number of hours they actually work can create unexpected complications.
Share this article