The UK tax income tax regime is ever-changing – as Government priorities change over time, so too do our payslips. Often it seems as though taxes only move in one direction (up!) however, there are still a few ways to reduce your tax bill – leasing an electric vehicle through a salary sacrifice scheme is gaining popularity as it can be a cheap and tax-efficient way to get into a new EV. We will discuss how this works, the tax savings available, and a few of the deals available.
A primer on income tax
Before talking about salary sacrifice, we need to touch on income tax.
In the UK there are three main taxes on income:
- Income tax
- National Insurance contributions (NICs)
- Student loan repayments (technically this is not a tax, but as repayments are based on your pay, it works like a tax)
In the UK income tax is ‘progressive’, meaning that higher earners pay a higher rate of tax:
TABLE 1: UK INCOME TAX RATES
| 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%c |
The tax burden on higher earners in Scotland is even bigger, as the higher rate of 42% starts at just £43,663. Combined with the 12% Class 1 National Insurance rate, this means that some Scottish taxpayers are paying a marginal rate of 54% – or 63% if they are also making student loan repayments at 9%.
With such a huge proportion of salary going to the Exchequer, it’s easy to see why some employees want to reduce their tax bill.
Salary sacrifice car schemes are a popular way to do this, as the lease repayments come out of your salary before tax. Instead of paying the repayments out of your own bank account, you ‘sacrifice’ some of your pre-tax salary, and in return your employer will provide you with a car.
Why an electric car?
Salary sacrifice car schemes exist for both petrol/diesel and electric cars, but choosing an electric car will actually be more tax efficient.
See, a car provided by your employer is what HMRC calls a ‘benefit-in-kind’. While you aren’t getting cash, you are still receiving a benefit from your employer which has to be taxed.
The way this works is that HMRC multiplies the value of the car (called the ‘P11D’ value) by a percentage (called the ‘BIK’ rate), which gives the benefit-in-kind value, which you will have to pay tax on at your marginal rate.
Lets look at a quick example:
Audi Q3 35 TDI (Diesel)
List Price (P11D Value): £39,920
BIK percentage: 33%
Benefit-in-kind: £13,174
Tax payable @40%: £5,269 per year
Hyundai IONIQ 5 125kW 58kWh (Electric)
List Price (P11D Value): £43,095
BIK percentage: 2%
Benefit-in-kind: £862
Tax payable @40%: £345 per year
So, from the example above it is obvious that the benefit-in-kind – and therefore the tax – associated with an electric car is much lower than that of a conventional fuel vehicle.
This is because the BIK percentages are based on the CO2 emissions of the vehicle, and are lowest for zero emission vehicles, at 2% (although this will rise to 4% in 2026). For comparison, the most polluting vehicles have a BIK percentage of 37%.
What does this mean for me?
Well, by choosing to get a salary sacrifice car you will get much more for your money, as this comes out of your pre-tax pay.
And, if you also choose an electric car, your benefit-in-kind, and therefore the company car tax you have to pay, is drastically reduced.
In effect, you can get your car almost tax-free.
Are there any other benefits?
Salary sacrifice schemes generally have very favourable terms. Usually there will be no upfront payments/deposits required, and extras such as road tax, maintenance (servicing), and breakdown cover are often included free-of-charge.
Some of the schemes also include home charger installation, or free public charging.
Your employer will be happy too, as they can typically save on the cost of employers National Insurance contributions as well.
Where can I get a salary sacrifice EV?
There are now suppliers of salary sacrifice electric cars popping up all over the place. The different schemes offer different benefits and drawbacks, although typically they provide lots of help and guidance making it as easy as possible for employers to sign up.
Famed car dealer Arnold Clark operates a salary sacrifice scheme, as do the energy supplier Octopus. If you are looking for an independent supplier, the Electric Car Scheme may also be worth considering.
Unfortunately, most suppliers don’t release prices publicly – you have to get in touch to get exact figures – however it’s worth shopping around to get the best package.
How much will it cost me?
As stated previously, exact figures are difficult to come by – although for the sake of illustration we will assume that you live in Scotland, earn £45,000 per annum, and are leasing an electric vehicle at £500 per month though a salary sacrifice scheme.
Without Salary Sacrifice
Gross pay: £45,000
Net pay: £2,847.49 per month
With Salary Sacrifice
Gross pay: £39,000 (+£6,000 in salary sacrifice benefits)
Net pay: £2,535.91 per month (£311.58 less)
As you can see, the £500 before tax becomes only £311.58 after tax. The savings can be even more substantial if you are a higher earner or have a student loan – for someone earning £50,000, living in Scotland, with a student loan, the cost after tax would be only £185.00 per month.
You can see exactly how your pay would change by using this calculator.
And of course on top of that, you’ll save on the cost of petrol!
Conclusion
So hopefully some of the benefits of salary sacrifice are now clear to you. We think this is a very financially compelling way to get into a new EV, and would encourage you to speak to your employer about salary sacrifice if you are considering a new car.
Of course, cars aren’t the only benefit that you can gain through salary sacrifice – making increased contributions to your pension, or purchasing childcare vouchers through salary sacrifice are other great ways to reduce your tax bill, and get more value out of your pay packet.
