Can an electric company car reduce your tax bill with a salary sacrifice?

The electric car salary waiver is a benefit that some employers offer to their employees so that they can use an electric car as a business benefit while reducing their tax burden.

HMRC allows employers to lease a car from a leasing provider and offer their employees the EV Salary Sacrifice Scheme, sometimes referred to as Salary Exchange, as a benefit.

In theory, the electric car scheme can help you save on taxes by reducing your salary and benefiting from low company car tax rates for electric cars.

Employees finance the electric company car with part of their salary before taxes, which leads to savings on social security contri­bu­tions and income tax.

Electric vehicles that are offered as part of the electric car scheme are classified by the tax office as “company cars” for personal use and are therefore subject to the benefit-in-kind tax (BIK).

The BIK tax liability of a company car can increase with higher list prices and CO2 emissions.

A favorable BIK rate of just 2% applies to electric cars, which is valid until 2025. There­after, the BIK rate is expected to increase gradually by 1% per tax year until 2028.

As with any method of financing a new car, there is no one-size-fits-all solution, with the best option for you depending on your personal financial circum­stances and driving needs.

It’s worth comparing an electric car salary sacrifice scheme with other, more tradi­tional car financing options, as industry estimates report a saving of between 30% and 60% compared to private leasing deals.

Understanding salary sacrifice and electric car leasing

A salary sacrifice car is leased from a third party that works with your employer. As an employee, you can give up a certain amount of your monthly salary in exchange for a new electric car.

The cost of the car is deducted from your salary each month before taxes are deducted. This means you save on income tax and National Insurance (NI) contri­bu­tions.

There is no specific limit to the amount you can sacrifice, but your reduced salary must remain above the National Minimum Wage (NMW).

Once you agree to a salary sacrifice plan for your car, you are bound to it for the term of the contract unless you quit your job. In this case you must return the car.

Not all employers offer a wage sacrifice plan for electric cars, nor are they required to offer one.

If your employer is not aware of the benefits of electric car salary sacrifice, it might be worth bringing this to the attention of the relevant department so they can assess the benefits for both the employer and its employees.

Salary losses for electric cars and company car tax

It is important to note that a salary sacrifice car is still subject to company car tax, known as benefit in kind (BIK).

The company car tax is charged monthly and depends on the value of the car, its CO2 emissions and your tax class.

The BIK tax repre­sents additional taxable income for employees, which is subject to income tax.

When calcu­lating the BIK tax, several factors must be taken into account, such as the vehicle’s list price (called the P11D value), its CO2 emissions, the type of fuel and the individ­ual’s personal tax rate.

Typically this is a percentage of the vehicle’s list price, although percentages vary depending on CO2 emissions and fuel type.

The company car benefit is then added to the employee’s total taxable income, which usually results in an increase in their total tax liability.

To encourage fully electric cars, the government has made BIK rates low so that employees taking advantage of salary sacrifice programs can benefit from minimal company car tax.

You can use the… Government online calcu­lator for calcu­lating BIK tax Your company car benefit.

The VED road tax is also much lower for electric cars, which is an added advantage.

Losses in wages for electric cars and higher tax rates for taxpayers

By reducing your salary, you automat­i­cally pay less income tax and national insurance.

If you’re a higher-rate taxpayer, a reduction in your salary could shift your income from the 40 percent income tax bracket to the 20 percent basic tax rate.

This would not normally be the main reason you would choose an electric company car. However, if you sacrifice so much wages that your income falls under the higher tax rate, you will only pay 20% tax instead of the 40% higher tax rate.

Salary waiver company car P11D

Salary sacrifice cars are considered company cars, meaning you will have to pay BIK tax, which will be reported to HMRC on a tax form called a P11D.

Most employers will issue you a P11D at the end of each tax year, detailing the value of your company car allowance.

When you receive it, you should check the company car number entered on your P11D for accuracy.

If you are completing a self-assessment tax return, you should report the number(s) of your company car benefit in kind from your P11D in the employment section of your tax return.

• To determine company car tax, multiply the vehicle’s P11D value by the BIK percentage.
• Next, take this amount and multiply it by your tax rate (20%, 40%, or 45%).
• Divide this total amount by 12 to determine your monthly benefit in kind.

Does a car pension with salary sacrifice affect my tax law?

All employees paid via PAYE have a tax code which must include the value of a benefit in kind for an electric car as wage sacrifice.

If you are claiming your company car allowance due to salary sacrifice, it is best to check whether your tax number is updated with the correct BIK value. If this is not the case, you should contact HMRC directly so they can make any changes if necessary.

If your business perfor­mance changes or you no longer receive it, you should check your tax code again to avoid incorrect tax deduc­tions.

Additional benefits of the salary sacrifice scheme for electric cars

Beyond reduced income tax and Class 1 NI contri­bu­tions, you may benefit from signif­icant fleet discounts from your employer, potential VAT savings and no credit check requirement for purchase.

You don’t have to pay a deposit and usually enjoy a fully serviced and insured new vehicle for the duration of the lease.

Electric car salary sacrifice provi­sions are often compre­hensive and typically cover all servicing and mainte­nance costs, as well as unlimited tire changes and repairs.

There are also disad­van­tages that should be taken into account. Because of your salary sacrifice, your net income will decrease, which may affect the amount you can borrow on a home mortgage or other types of personal loans.

Impor­tantly, this may also impact your pension plan and some company and statutory benefits, as these may be calcu­lated based on your reduced salary.