How Does Electric Car Salary Sacrifice Work?
We'll get into detail later, but the principle is straightforward.
As an employee you give up part of your pay (weekly or monthly) in return for a company car.
The amount you give up is related to the cost to your employer or financing, maintaining and insuring the car for you each month.
The period you get the car is known as the 'term' and usually there's an agreed annual mileage too.
For example, you might get a car under an Electric Car Salary Sacrifice Plan for 4 years with an annual mileage allowance of 10,000 miles and during that period the car's running costs (finance, maintenance and insurance) are covered by a reduction in your pay.
Because the salary adjustment is made to gross pay, this typically reduces your monthly tax and NIC liabilities (and the employer's NIC too) compared to normal salary (as electric company cars are currently taxed at a much lower rate than pay or company car benefit for 'traditional' company cars with petrol, diesel or hybrid engines).
How Do You Save From An Electric Car Salary Sacrifice Plan?
This is where Electric Car Salary Sacrifice puts the 'cunning' into 'plan'.
On your behalf, your employer contracts with a supplier for a company car, typically on business contract hire.
As a result the monthly cost of the car is at a business rate of finance, typically much lower rate than the rate for personal finance.
A fixed price maintenance contract is typically also added, so the employee knows exactly how much servicing, maintenance and repairs ('SMR') will cost. Breakdown recovery is typically included too.
Finally, a company motor insurance plan (or 'fleet motor policy') provides insurance cover for the car and, often, insurance to cover circumstances where you are made redundant or where the car is written-off in an accident (known as 'early termination' insurance).
The employer has now wrapped up in a monthly cost bundle a company car which should be cheaper than if the employee was to try and put together a similar bundle for themself.
Now all the employer has to do is allow employees to sacrifice some of their pay to get a car for a lot less per month than they would usually pay, and with a lower tax/NIC liability on the company car than on the equivalent salary.
And The Icing On The Cake Is ...
Electric company cars are currently taxed on minimal amounts each tax year, so the employee typically saves income tax and NIC in comparison to 'cash' pay.
And the same applies to the employer - there's currently only a very small employer's NIC liability on an electric company car compared to the equivalent salary.
As a result, both sides benefit from savings in an Electric Car Salary Sacrifice plan in comparison to 'cash' pay.
The Fly In The Ointment.
In fact, there are two flies in the ointment.
The first is a set of tax rules relating to pay arrangements where an employee can choose between a perk or cash. These rules are known as 'OpRA'.
The second relates to complications in the rules for recovering VAT and getting business tax relief on car lease rentals.
We've explained more about each of these issues below.
OpRA And Salary Sacrifice
Having the option to choose between a perk and cash is caught by special tax rules known as 'Optional Remuneration Arrangements'.
To save space here we've explained OpRA in another help page, so if you want to read up then click on the link and we'll save your place here.
The key point for employees joining an Electric Car Salary Sacrifice plan is that the current OpRA rules have a get-out clause for electric company cars.
Drivers in an Electric Car Salary Sacrifice plan still benefit from low taxes until April 2028 on electric company cars.
However (sorry, there had to be a 'however'), if the employee wants a hybrid car or one with an internal combustion engine the tax position under OpRA may not be as good.
OpRA tax problems can arise with cars where the car's CO2 output exceeds 75GP/Km - take a look at our explanation of OpRA to see more about this.
But this still leaves electric company cars (and some hybrids with lower CO2 outputs) as an attractive benefit under a Car Salary Sacrifice plan.
VAT and Tax Relief On Salary Sacrifice
An employer normally recovers VAT paid out on business supplies, but can't normally recover all of the VAT incurred on contract hire rentals for company cars - usually only half the VAT paid on the rentals can be recouped by the business.
As a result, an employer will normally need to charge the employee for the 'lost' VAT, typically through a higher monthly/weekly adjustment to the employee's pay.
And there's a further complication if the employer provides a hybrid or ICE company car under a Salary Sacrifice plan instead of an electric car.
Not only do hybrids and ICE company cars carry higher tax liabilities for the employee, the employer can't always deduct the whole of the contract hire rentals from business profits taxes.
If the CO2 output of the car exceeds 50GP/Km then only 85% of the lease rental payments are tax deductible.
Now this won't affect electric cars (which have a zero CO2 output), but hybrids and ICE company cars with higher CO2 ratings could be hit.
As a result, all leased company cars with CO2 outputs over 50GP/Km will have higher total running costs for the employer due to the tax disallowance.
But these VAT and tax factors can be included in the calculation for an Electric Car Salary Sacrifice, so the employer isn't out of pocket for them.
How Much Does Electric Car Salary Sacrifice Cost?
The monthly cost of Car Salary Sacrifice will depend on your choice of car.
Keep in mind that, in addition to the cost of the car (in terms of monthly finance payments), your employer will also have additional costs from running a Car Salary Sacrifice scheme.
These additional costs (such as restrictions on VAT that can be recovered by a business and limits on business tax relief for Corporation Tax) may need to be added by your employer to the monthly costs of Car Salary Sacrifice charged to you.
You can get an idea of the typical monthly costs by using our car salary sacrifice calculator.
Is Electric Car Salary Sacrifice Worth It?
It will depend on your personal circumstances and whether or not you are looking to save money from car salary sacrifice.
- If you a looking for an electric car then at the moment you will typically save money from an electric car salary sacrifice plan in comparison with a 'cash' salary due to the tax savings.
- If you a looking for a hybrid car or one powered by petrol or diesel then your choice of car could make the difference between whether or not you save money with salary sacrifice - use our car salary sacrifice calculator to check.
So, Show Me The Money ....
Despite the limitations we've just explained, providing electric company cars (or low CO2 company cars) under a Car Salary Sacrifice plan will still give a cost and tax advantage over cash pay.
As a result, an Electric Car Salary Sacrifice plan can therefore be a highly attractive and cost/tax effective perk for an employee.
To help you work out whether you or your employer could benefit under an Electric Car Salary Sacrifice plan, we've produced a free calculator to show the potential savings.
Just click on the button below to try it.