What to Consider Before Choosing EV Salary Sacrifice
Key Insights:
EV salary sacrifice schemes can save employees 20-50% through pre-tax payments, but they should understand the BiK tax implications (currently 3% for 2025/26) and how these rates will increase annually until 2029/30.
Protection against early termination is crucial when considering salary sacrifice - schemes like The Electric Car Scheme offer Complete Risk Protection covering circumstances like redundancy, resignation after three months, and parental leave.
Unlike personal car financing options, salary sacrifice agreements are lease arrangements with no ownership option at the end of term - employees must return the vehicle or arrange a new agreement for a different vehicle.
Salary sacrifice enables companies to offer electric cars as an employee benefit. The employer leases the vehicle while employees exchange part of their pre-tax salary to cover costs. Though this arrangement has advantages for both parties, there are many important considerations to make before implementing the scheme.
This guide outlines the key factors employers and employees should evaluate before committing to an electric car salary sacrifice scheme!
Tax Implications
Understanding the tax structure is very important when considering an EV salary sacrifice scheme.
Employees benefit from reduced income tax and National Insurance contributions as the payments come from pre-tax salary. However, they will incur Benefit in Kind (BiK) tax, currently set at 3% for electric vehicles for 2025/26 - this will increase by one percentage point year-on-year until 2029/30
Employers should factor in potential changes to BiK rates and ensure employees understand how these might affect their monthly costs over time. Additionally, employers can reclaim 50% of the VAT on lease payments and may benefit from reduced employer National Insurance contributions, though these savings are typically used to offset scheme administration costs.
Contract Length Commitments
Most EV salary sacrifice schemes require commitments of 2-4 years. This fixed-term arrangement ensures the leasing company can offer competitive rates, but it means both employer and employee are bound to the agreement for the duration.
Before signing, employees should consider their career plans and personal circumstances -changing jobs may trigger early termination fees unless protection measures are in place. Employers should evaluate their workforce stability and ensure they understand what happens if an employee leaves. Some providers, like The Electric Car Scheme, offer early termination protection that covers specific circumstances like redundancy or parental leave, which can significantly reduce risk for both parties.
Mileage Limitations
All EV salary sacrifice leases come with annual mileage restrictions, typically ranging from 5,000 to 20,000 miles. Exceeding these limits will result in excess mileage charges at the end of the lease, usually between 5p and 15p per additional mile.
Employees should realistically assess their driving habits, including commuting, personal trips, and any potential lifestyle changes that might affect their mileage needs. Choosing too low a mileage allowance to reduce monthly payments can prove costly in the long run, while selecting an unnecessarily high allowance means paying for miles that won't be used. Most schemes allow for some adjustment during the lease, but any increases will raise monthly payments.
End-of-Lease Options
As the lease term concludes, employees need to understand their available options. Unlike Personal Contract Purchase (PCP) arrangements, salary sacrifice schemes typically don't include the option to purchase the vehicle at lease end. Instead, employees must either return the vehicle in acceptable condition (allowing for fair wear and tear) or potentially arrange a new salary sacrifice agreement for a different vehicle.
Any damage beyond normal wear and tear will incur charges, as will missing service records or modifications to the vehicle. Some providers offer lease extension options for short periods, which can be useful if employees are undecided about their next steps or are awaiting delivery of a new vehicle.
Owning Vs Salary Sacrifice
Car ownership offers complete control - you can modify your vehicle as desired, but you are responsible for all insurance, maintenance, and future road tax costs. Alternatively, salary sacrifice provides a monthly payment option for an agreed period, with The Electric Car Scheme including insurance, maintenance, and future road tax in your package, plus support throughout the term.
The primary advantage of salary sacrifice is payment through gross salary - you get your chosen vehicle with all costs included and save 20-50% through pre-tax payment. Remember two key points: you don't own the car, and since your employer leases it on your behalf, it's classified as a company car.
Common Questions We Get Asked
When considering an electric car salary sacrifice scheme, many prospective participants have similar concerns. Below are answers to the most frequent questions we receive from both employers and employees looking to understand the practicalities of these arrangements.
What Happens If I Change Jobs During The Lease?
If you change employers during your lease term, several outcomes are possible. Without protection in place, you may be liable for early termination fees, which can be substantial. However, many providers (like The Electric Car Scheme) offer Complete Risk Protection that covers resignation after a specified period (typically 3-6 months into the lease).
Alternatively, some schemes allow the lease to be transferred to your new employer if they also operate a salary sacrifice scheme. In some cases, you might have the option to convert the agreement to a personal lease, though this would mean losing the tax advantages of salary sacrifice.
How Does This Affect Other Benefits, Like Pension Contributions?
Salary sacrifice reduces your gross salary, which can affect salary-related benefits. For pension contributions, the impact depends on how your scheme is structured. If your pension contribution is calculated as a percentage of your gross salary, the amount contributed would decrease. However, many employers adjust their pension calculations to use your pre-sacrifice salary to maintain the same level of contributions. It's essential to check your employer's specific policy before proceeding. Other salary-linked benefits, like life insurance, income protection, or bonus schemes, may also be affected.
Can I Still Claim Mileage Expenses From My Employer?
Yes, you can typically still claim business mileage expenses when using a salary sacrifice vehicle. However, the reimbursement rates may differ from standard HMRC rates for private vehicles. Since you bear the costs of fuel for the vehicle (despite it being technically company-provided), most employers allow claims for business-related travel.
The electric mileage rate is cheaper per mile than for petrol or diesel vehicles, reflecting the lower running costs of EVs. Check your company's specific policy, as some may have their reimbursement structure.
Do I Own The Car After Salary Sacrifice?
No, unlike some personal car financing options, you do not own the car at the end of a salary sacrifice agreement. These schemes are lease arrangements, not purchase plans. When the term ends, you return the vehicle to the leasing company. There is typically no option to purchase the car at the end of the term. If you wish to continue with a salary sacrifice arrangement, you would need to enter into a new agreement for a different vehicle. This model allows employees to regularly update to newer, more efficient electric vehicles as technology advances.
Can I Salary Sacrifice If My Employer Doesn't Offer It?
Unfortunately, you cannot enter into a salary sacrifice arrangement independently. Salary sacrifice requires employer involvement as they must lease the vehicle and adjust your payroll accordingly.
If your employer doesn't currently offer an EV salary sacrifice scheme, you might consider presenting the benefits to your HR department or management team. Many providers offer free consultations to companies exploring these schemes, highlighting the potential for zero net cost to the business while offering substantial employee benefits.
What If I Want To Salary Sacrifice Two Cars?
Most salary sacrifice schemes allow employees to have multiple vehicles, provided their remaining salary doesn't fall below the National Minimum Wage after all deductions. However, each vehicle will require a separate salary sacrifice agreement and will impact your taxable income accordingly. Before committing to multiple vehicles, carefully consider the combined impact on your take-home pay and ensure the total sacrifice amount is sustainable for your budget. Some employers may also have policies limiting the number of vehicles per employee to manage administrative complexity.
The Electric Car Scheme: Key Benefits
The Electric Car Scheme offers transparent, flexible electric car salary sacrifice with access to the entire lease market and Complete Risk Protection covering redundancy, resignation (after three months), and other life changes. We provide comprehensive support, including dedicated account management, employee webinars, automated reporting, and HMRC compliance assistance. Our specialists help you understand all costs, including BiK tax, while tailoring your lease to your specific needs.
Learn more about The Electric Car Scheme on our website!
