Your Definitive Guide to Salary Sacrifice and Electric Cars

Salary Sacrifice and Electric Cars-Your Definitive Guide

The finance product / arrangement at the heart of the UK’s electric vehicles (EVs) over the last three years has been something called Salary Sacrifice. While this is not bespoke to cars - see the advice from HMRC for an overview.

In the last few years the benefits of salary sacrifice with pure electric cars have truly been realised and based on the key points we will be discussing below, it’s fairly clear as to why many employees are utilising their employer’s internal scheme to enjoy the benefits of a pure electric automotive.

Indeed, for February 2023 some 12,310 EVs were registered in the UK and the Tesla Model Y was the 6th best-selling car . 

But it isn’t just a case of an employee electing to have a salary sacrifice vehicle; there are rules, schemes and paperwork (plus a few considerations) which need addressing first and this is often overlooked by ambitious employees looking to move forward with a new BEV!

All of our guidance on the e-car lease Electric Car Scheme  (a bespoke salary sacrifice arrangement) provides detailed employer and employee guides available for your perusal. To be clear, while our guides do help employees work out the potential benefit of a new EV, our team can only assist you with the permission of the employer.

At the start of the process, you need to have express permission from your directors or HR team and our team cannot offer quotations or indications without this. The reason for this is that salary sacrifice is essentially a business contract hire arrangement, where your company / employer is agreeing to undertake the lease of the EV with a nominated finance company and then, via the HR and payroll team, organise the gross amount to be deducted from your salary BEFORE tax.

So while the employer has the direct relationship with the leasing company, as the employee you are having to reduce your salary in order to pay for this. But, you MUST ensure your employer and their HR / Payroll team permit you to do this and that you all understand the product entirely.

At e-car lease, we do not administer the electric car scheme; we help your employer do this and it is essentially an agreement between you, the employer and the finance company. As long as your employer is approved via our select finance company on credit, we can assist you to organise a new car order. 

So is it just electric cars that you can use for a salary sacrifice scheme?

As we noted above, the notion of sal sac has existed on other products and services, including cars, for some time. While you can essentially sacrifice for your salary on ANY car, combustion or EV, as this is considered a benefit to an employee, this means that Benefit In Kind (BiK) is payable. So not only will an employee have their salary deducted, there will also be a monthly taxation deduction applied each month.

The amount of tax, also known as company car tax, which is payable on is based on the vehicle’s value (P11d), the employee’s income tax rate (20% / 40% / 45%) and the BiK rate. The great news on EVs is that until 2024/25, there will only be a 2% BiK  rate which effectively results in nominal company car tax bills. In comparison to combustion options, we are talking about hundreds of pounds per month in tax difference!

As a result of these ambitious tax savings, all of which are set out on our “living with your ...” tools on the e-car lease website, our scheme is always based on zero-emission vehicles. And the whole impetus of the e-car lease team is to encourage the uptake of electric cars across the UK.

But how is salary sacrifice cheaper for an employee?

To be clear, the “savings” you see banded around online or via advertisements pertain to your income tax. If you are offered a company car solution, your employer will pay for the vehicle, maintenance, insurance and, in some cases, the fuel or electric expenses.

This is not what is being offered with a sal sac arrangement; a company car option is very different. In contrast, a personal contract hire arrangement is one where you use your own money, which is your salary after income tax has been applied, in order to procure a new vehicle. For PCH, you must pay for the vehicle, maintenance, insurance and fuel personally plus you do not benefit from any VAT reclamation.

The notion of salary sacrifice sits somewhere in the middle and, depending on your employer’s scheme, allows you as an employee to use your gross salary (before income tax is deducted) to pay for a vehicle; this is where there is an immediate 20-45% tax saving. In addition, because you can include facets like maintenance, insurance and charge points within this calculation, you can also enjoy income tax savings on those aspects too.

So long as your employer is VAT registered, they can reclaim up to 50% of the VAT on the finance element and 100% on the maintenance element of the rental; which is another considerable saving that PCH cannot replicate.

And because the gross salary is utilised, an employee (and employer) will reduce their National Insurance Contributions (NIC), so this is yet another saving which can be passed on. However, the NIC savings do not have to be passed on to the employee by right; this is something which needs to be agreed when setting up a scheme. But, to answer the original question, a Salary Sacrifice Scheme is much cheaper than a comparable PCH agreement on a like-for-like deal electric car.

But are there any catches or elements to consider?

While there are various brokers and finance companies offering to help employers set up leading schemes (as part of staff retention), they will not always be transacted on a comparative basis. For the Electric Car Scheme we offer the following below:

•  Expert EV advice - this is the KEY reason for using the e-car team. Not only do we have the leading electric car procurement website in the UK, our tools, guidance and bespoke EV EPC© certificates ensure that all the drivers receive an electric solution which is suitable for your needs and requirements. From real range to charging times to charging speeds, our unique options ensure the right result. We do not provide combustion, hybrid or plug-in hybrid vehicles on a salary sacrifice arrangement;
•  Vehicle + Maintenance - every salary sacrifice arrangement will include the electric car an employee requires (we offer any make and model) plus all maintenance, service and breakdown recovery. With the exception of a charge point and the fuel / electricity (which can be added to your agreement in some cases) the Whole Life Cost of the EV is taken care of. Excess mileage and condition of the vehicle is not covered and this must be agreed upon by the employer and employee;
•  Early Termination Insurance - underlying every salary sacrifice arrangement is a business contract hire agreement. What this means is that a fixed term contract between the employer and the finance company is put in place and there are responsibilities under this contact as to the mileage, condition and contract end date. If a contract needs to be ended, the general rule is that at least half of the remaining rentals need to be paid in order to return the vehicle before contract cessation and this is a bill the employer would incur. To protect against this, at e-car lease we do offer a bespoke Electric Car Scheme assurance policy where the maximum penalty is an amount equivalent to three rentals to return the vehicle, which must be paid by the employer (it is down to the employer to organise how to collect this from the employee or just undertake the risk). Or, we can organise ET insurance, by way of passive introduction to a dedicated insurance broker who can quote you both a monthly fee and an upfront cost to protect against this. The employer / employee must agree on how this is paid;
•  Motor Insurance - our prices do not, as standard, include motor insurance. However, there are two choices with our scheme including: 1) work with Churchill Insurance to setup a fleet policy / salary sacrifice policy with the employer / employee and apportion this cost to salary sacrifice; or 2) arrange for the employee to set up their own motor insurance personally and outside of the salary sacrifice arrangement. As a credit broker in contract hire and leasing we CANNOT provide advice or quotations for motor insurance and we must always refer the employer on (with express permission) to dedicated insurance professionals; and
•  Payroll and Scheme Setup - the team at e-car can introduce you to the team at BCF Wessex (Gensen) to work with your HR, Finance and Payroll to team to understand what documents need to be put in place in order to administrate a legally compliant scheme. To be clear, this is not something we can do as we are neither accountants or HR experts. An employer must administrate and take responsibility for the scheme BUT if you do need assistance, we suggest that you liaise with the BCF team to help you understand the basic infrastructure and next steps. The cost for this is additional and this is added to the monthly payment your employee makes. 

If you are considering an electric sal sac scheme for your business, just get in touch with our team and we can send to you the appropriate guides and policies to understand whether you feel this is suitable for your situation. At e-car we do not recommend or encourage our customers to take an electric car or to pursue a salary sacrifice arrangement. We simply provide the necessary information for you to make an informed decision.

In terms of the car shown, the  Renault Zoe Hatchback 100kW GT Line + R135 50kWh Rapid Charge 5dr Auto Pure Electric Vehicle, this is based on the following configuration:

•  Metallic Paint - Titanium Grey
•  Synthetic leather/fabric (recycled) - Black/Grey
•  16" Diamond cut alloy wheels
•  Mode 3 / Type 2 Charging Cable (Public Charging & home wallbox charger – Fast charging) 

Think the Renault Zoe is the perfect salary sacrifice car?

This option uses a 52 kWh usable battery which will deliver 100 kW (or 134hp), 0 - 62 times of 9.5 seconds and top speeds of 87 mph. Combined real ranges are at 160 miles in cold weather and 220 miles in warmer weather (on a full charge). In terms of charging times / capabilities - the standard  22 kW AC max allows a 0 - 100% session in around 3 hours with the 46 kW DC rapid charge enabling 56 minutes 10 - 80% times. There is a 338L cargo volume available with this hatchback,  Browse our latest Zoe lease deals 

Also compare a Zoe with the Vauxhall Corsa-e,   Peugeot e-208 and   VW e-UP!