It may seem counter-intuitive, but taking a pay cut and opting for a salary sacrifice scheme with an electric car can boost take-home pay thanks to tax and national insurance contribution (NIC) savings.
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Electric cars work well as part of a salary sacrifice scheme because the taxable benefit for employees is low. It is calculated as just 2% of the car’s list price. This percentage is due to increase by 1% for each of the next three tax years, but will still be a fairly reasonable 5% by 2027/28.
However, it is important to note that while some hybrid cars can have the same tax advantage (if they have CO2 emissions lower than 75g/km), the electric range of most hybrid models is too low to qualify for the 2% rate. The current percentage for most hybrids will be a less attractive 12%.
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With tax thresholds frozen, more and more employees are facing higher marginal tax rates. A rate of 60% applies to income between £100,000 and £125,140 due to the withdrawal of the personal allowance. An electric car could be worth considering for the following reasons:
• An employee earning £125,000 might sacrifice £10,000 of their gross earnings to cover the cost of the employer leasing an electric car worth £40,000. The employer’s leasing arrangements will typically cover the running costs of the car.
• The employee’s net pay will only be reduced by £3,800, although they will also have to pay tax of £480 on the benefit of having the company car. In 2027/28, when the benefit in kind percentage has increased to 5%, the tax payable would be £1,200 assuming all other things remain equal.
• However, if the employee had leased the car personally, it would take around £26,000 of their gross pay to cover similar leasing costs.
From the employer’s perspective, an electric car salary sacrifice arrangement could help boost staff retention, as well as attracting new staff.
Using a salary sacrifice in this way will only work if the car has CO2 emissions lower than 75g/km – if the same arrangement was made for a car with emissions exceeding 75g/km the benefit in kind would be based on the salary foregone (£10,000) thus negating any tax and NIC advantages.
Please contact us if you would like any further information on how a salary sacrifice for an electric vehicle could work for you and your employees.
