Will electric car salary sacrifice affect my pension?
Salary sacrifice schemes are a good way for companies to provide their employees with benefits without taking on the cost. In the case of electric car salary sacrifice, the business provides the car for the employee who sacrifices part of their salary to cover the cost of the car.
Unlike traditional car leases, where payments come from net pay (post-tax income), salary sacrifice deducts expenses from the gross salary (pre-tax income). This tax-efficient approach allows employees to maximise their savings.
At The Electric Car Scheme, employees can save up to 60% on any electric car by reducing their salary in exchange for an electric car as a benefit - making electric cars affordable for everyone.
Wondering how this could affect your pension? We'll provide you with a guide detailing various pension schemes and the potential impact of salary sacrifice on your contributions, whilst also breaking down salary sacrifice payments and how it works at The Electric Car Scheme.
How do salary sacrifice schemes work?
Salary sacrifice schemes operate by employees opting to use a portion of their salary toward a beneficial item or service. The Electric Car Scheme resembles the Cycle to Work scheme, allowing individuals to get an electric car through salary sacrifice by sacrificing some of their salary.
Unlike traditional car leases, where payments come from net pay (post-tax income), salary sacrifice deducts expenses from the gross salary (pre-tax income). This tax-efficient approach allows employees to maximise their savings.
Companies choose to offer electric car salary sacrifice as a benefit to boost employee satisfaction and retention, or to advance ESG (environmental, social, governance) objectives. It is a great way to ensure your employees are happy at no cost to the company.
How much will I save on an electric car with salary sacrifice?
At The Electric Car Scheme, employees have the opportunity to save up to 60% on their preferred electric car because of available tax savings. Let's explore the pricing breakdown for two currently available cars at The Electric Car Scheme.
£424 per month, saving a total of £257 in income tax and national insurance savings. You will have to spend a small amount, £31, in benefit-in-kind tax (BiK). You can learn more about BiK in our dedicated guide.
You can get a Mini Electric for just £390 with The Electric Car Scheme because you save £236 in income tax and national insurance savings. You can read more about the small cars we have available in our blog: your guide to the best small electric cars.
How does salary sacrifice affect your pension?
Depending on the type of pension you have, salary sacrifice may affect your pension. In the UK there are two types of pensions: defined contribution (DC) and defined benefit (DB). Defined contribution is the most common type of pension scheme in the UK, whereas defined benefit is based on your salary and how long you have worked for your employer. We will break down the difference between the two pension schemes and explain how salary sacrifice affects this.
What does this mean for defined-benefit pensions?
Defined benefit pension schemes receive funding from both employers and employees. This pension plan remains common in the public sector but rare in the private sector. The company determines the amount paid into your DB pension because they take responsibility for the investment and distribution. The amount in your DB pension depends on the number of years you’ve been a member of the employer’s scheme and the salary you’ve earned upon departure or retirement.
When you retire, the pension you get will depend on the value of your pension fund. DB plans are broken down into two payment options: annuity and lump-sum payments. Annuity payments are spread out monthly until death and a lump-sum payment is the entire value of one plan paid at once.
If the government hasn't approved the salary sacrifice scheme, it can impact your defined-benefit pension. For example, if you are a participant in the Teacher’s Pension Scheme (TPS), your pension calculation is based on your average career earnings. Since car salary sacrifice isn't an approved form of sacrifice, any pay reduction due to salary sacrifice will lower your average earnings throughout your career and consequently affect your retirement pension.
What about defined contribution pensions?
Defined contribution schemes are funded primarily by the employee and are the most common type of pension available today. The company may match the contribution up to a limit they decide to set but the employer has no involvement in the account’s performance once the funds are deposited. A DC scheme is attractive to companies because these plans require little work and are low-cost. The employee is responsible for making contributions and choosing investments the plan offers. The investments in a DC plan grow tax-free until they are withdrawn in retirement.
In the case of defined contribution pensions, salary sacrifice is highly unlikely to impact your pension because your pension calculation occurs before the salary sacrifice application.
Does it affect your state pension?
Your entitlement to the State Pension is determined by looking at your annual payments for primary contribution purposes throughout your working life. Everyone is entitled to a State Pension when they reach retirement age but there are other factors - such as age and gaps in National Insurance record, which may arise when you’re not working or your wage is low.
Your State Pension should not be affected by a salary sacrifice scheme because you will have accrued the qualifying years for a State Pension and exceed the Lower Earnings limit of £6,396. You would need to have worked very few hours per week whilst still complying with the National Minimum Wage threshold - which is unlikely.
Why choose The Electric Car Scheme as an electric car salary sacrifice provider?
The creation of The Electric Car Scheme stemmed from the complexity often associated with understanding and applying government incentives for electric car salary sacrifice. Everyone wants to make choices to achieve a net zero future but people are limited by information, access and price, which is slowing down progress globally. The pace of achieving net zero is a huge problem because each tonne of carbon emissions contributes to climate change for centuries.
There are now so many different salary sacrifice providers on the market, that it can be difficult to decide which one to go for. We have compiled some reasons you should choose The Electric Car Scheme.
Best prices available
You will access the top leasing companies to ensure the best prices are available
No cost to the employer
We believe net zero choices should be affordable to all. There is no net cost to your business to run the scheme because our fee is equivalent to your employer's tax savings.
Trusted 5* service
Serving thousands of customers and rated “excellent - 5 stars” on Trustpilot, you can rest assured that you are in good hands.
Complete Risk Protection
We provide market-leading protection from day one, to safeguard you from unexpected costs if your electric car needs to be returned early. It protects the employer from any shortfall due to employee resignation, long-term sickness or family-friendly leave. A new and unique feature even protects employers if the employee doesn’t repay the company for damage to their car. You can learn more about Complete Risk Protection here.
You can learn more about The Electric Car Scheme by visiting our website or you can see the electric cars available by experimenting with our quote tool!
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.
