Electric Car Salary Sacrifice and Variable Pay: How It Works
In 2023, The Electric Car Scheme team surveyed 250 managing directors, finance directors, and HR directors. The findings indicate that 83% of respondents intend to introduce an electric car salary sacrifice scheme for their employees in 2024, and 16% already have one in place. The awareness of salary sacrifice schemes, particularly for electric cars, is on the rise. This is positive news for employees interested in transitioning to electric vehicles to lower their carbon footprint and take advantage of favourable tax incentives! You can find additional details about the survey here.
In this blog post, we discuss how salary sacrifice works if your pay is variable because this can be a confusing grey area for many.
What is salary sacrifice?
Salary sacrifice involves an agreement between an employee and employer where the employee directs a portion of their salary toward a specific benefit. This tax-free arrangement reduces both income tax and national insurance contributions. Common uses include saving for retirement, covering childcare expenses, purchasing a bike, or leasing a car. Employers implement salary sacrifice by modifying employment contracts, but it's important to ensure that it doesn't bring an employee's cash earnings below the national minimum wage. Opting for a salary sacrifice scheme means willingly forgoing part of one's salary, resulting in a reduced income, but the advantage lies in the diminished tax and insurance payments, allowing more money to be allocated towards personally beneficial expenses.
What are the benefits of electric car salary sacrifice for employees?
The key advantage for employees engaging in the electric car salary sacrifice program is the significant reduction in the price of acquiring a new electric car. Through The Electric Car Scheme, savings of 30 to 60% can be achieved on any electric car, thanks to our access to top leasing companies, ensuring the best market prices. This salary sacrifice initiative not only makes electric cars more financially accessible but also addresses the environmental impact, considering the increasing concern about climate change, highlighted by 2023 being the warmest year on record. Embracing electric cars is a significant way individuals can reduce their carbon emissions and minimise their carbon footprint.
For example, if an employee earns £50,000 a year and wants to salary sacrifice a Tesla through The Electric Car Scheme they would pay £594 a month for a salary sacrifice benefit, their yearly earnings would reduce to £42,872. They’d then only pay Income Tax and National Insurance on annual earnings of £42,872.
How are your salary sacrifice savings calculated depending on your salary?
The amount of tax you pay each year is determined by two factors:
1. The portion of your tax that exceeds your Personal Allowance
2. The tax band you fall into.
Here is a table that shows the tax rates you pay in each band if you have a standard Personal Allowance of £12,570.
| Band | Taxable Income | Tax Rate |
|---|---|---|
| Personal Allowance | Up to £12,570 | 0% |
| Basic Rate | £12,571 to £50,270 | 20% |
| Higher Rate | £50,271 to £125,140 | 40% |
| Additional Rate | Over £125,140 | 45% |
Breakdown of electric car salary sacrifice savings
In 2023, the Tesla Model Y stood out as the top choice for salary sacrifice. With a WTLP range of 331 miles and the ability to accelerate from 0 to 62mph in just 3.5 seconds, its popularity is attributed to superior driving dynamics, boasting solid handling and rapid acceleration.
By opting for the Tesla Model Y through salary sacrifice, you can enjoy significant savings. The scheme offers £348 in Income Tax and National Insurance savings, resulting in a monthly payment of £523 instead of the average lease price of £828.
Meanwhile, the MG4 secured the third spot in popularity at The Electric Car Scheme. With five models available - SE, SE Long Range, Trophy, and Trophy Long Range - the standard range base, SE, features a 50.8kWh battery and a range of 218 miles. Despite the monthly gross cost being £397, the salary sacrifice savings make it possible to own this car for just £256 per month. Additionally, there's a small fee for the benefit-in-kind tax, amounting to £26 each month. You can read more about BIK tax in our dedicated guide.
Can employees on variable pay use a salary sacrifice scheme?
An employee receiving variable pay can participate in a salary sacrifice scheme provided as an employee benefit. It's crucial to note that such a scheme cannot be utilised if it would bring the employee's earnings below the National Minimum Wage. This requirement is essential to ensure that, even after the salary sacrifice deduction, their basic salary consistently remains above the threshold. Failing this, there is a risk of falling below The National Minimum Wage, particularly in months without additional pay.
It's important to be aware that the rates for The National Minimum Wage will change in April 2024, with workers aged 21 and over being entitled to the National Living Wage. Presently, the current rate stands as follows.
| 23 years and over | 21 to 22 years old | 18 to 20 years old | Under 18 years old | Apprentice | |
|---|---|---|---|---|---|
| Current Rate (as of January 2024) | £10.42 | £10.18 | £7.49 | £5.28 | £5.28 |
How does it work?
Salary sacrifice schemes function similarly for those with a variable income, although it gets a bit trickier when earnings vary a lot each month.
Here's the breakdown: An employee agrees to pay your company a set amount from their pre-tax earnings. The tax is then calculated based on their total yearly salary, which depends on how much they earn. Now, if an employee's income fluctuates significantly, entering different tax brackets, it affects how Income Tax and National Insurance are calculated.
National Insurance tax is figured monthly, based on the previous month's earnings. On the other hand, Income Tax considers the total earnings so far in the current year. This means the amount of Income Tax and National Insurance an employee pays can change. They might pay a basic rate one month and a higher rate the next. Depending on when they receive variable pay, they could get an Income Tax rebate if they paid more than needed based on their total income.
Is salary sacrifice worth it if my income varies?
If your monthly salary consistently stays above the National Minimum Wage, even without factoring in commission or bonuses, you should encounter no problems with opting for a salary sacrifice for an electric car. It's crucial to ensure that this is a practical choice for you before proceeding.
Learn more about electric car salary sacrifice with The Electric Car Scheme
Instead of leasing a car the normal way, salary sacrifice allows employees to lease electric cars via their employers. Government tax incentives promote sustainable choices, but they can be complex and difficult to access. The Electric Car Scheme makes it simple to access these incentives to transition to Net Zero. Employees can access an electric car by sacrificing a portion of their pre-tax salary. Usually, when leasing cars, the employee would pay with their net salary (after tax). With salary sacrifice, the employee deduces this from their gross salary (before tax), meaning this comes from income tax and national insurance.
Employers can attract and retain top talent, improve their ESG goals and save money in the long term by providing this as an employee benefit. As an employer, you can give employees access to a huge range of electric cars.
You can read more about what salary sacrifice is, how it works and the benefits for both employees and employers in our blog: are salary sacrifice schemes a good idea?
Our lease pricing is based on data collected from The Electric Car Scheme quote tool. All final pricing is inclusive of VAT. All prices above are based on the following lease terms; 10,000 miles pa, 36 months, and are inclusive of Maintenance and Breakdown Cover. The Electric Car Scheme’s terms and conditions apply. All deals are subject to credit approval and availability. All deals are subject to excess mileage and damage charges. Prices are calculated based on the following tax saving assumptions; England & Wales, 40% tax rate. The above prices were calculated using a flat payment profile. The Electric Car Scheme Limited provides services for the administration of your salary sacrifice employee benefits. The Electric Car Scheme Holdings Limited is a member of the BVRLA (10608), is authorised and regulated by the FCA under FRN 968270, is an Appointed Representative of Marshall Management Services Ltd under FRN 667174, and is a credit broker and not a lender or insurance provider.
