Salary Sacrifice for an Electric Vehicle
Salary sacrifice electric
vehicle schemes are gaining popularity among employers and employees due to
their financial and environmental benefits. They have seen a growth in adoption
of over 50% year-
on-year. While most schemes focus on new electric vehicles, some may
also include used models.
These schemes allows the employee to lease an electric vehicle by giving up (sacrificing) a portion of their pre-tax salary. The salary sacrifice occurs before tax and NI are calculated, resulting in significant tax and National Insurance savings for the employee. Higher rate taxpayers obtain a greater tax saving. The scheme can be made available to all employees who would still earn above the National Living Wage after the salary sacrifice.
An annual benefit in kind tax is payable by the employee on the value of the car, but this
is lower for an electric vehicle than for other cars. For the 2025/26 tax
year, the benefit in kind rate for a purely electric vehicles is 3%, based on the car's list price. This rate will increase by 1% each year up to
2027/28.
Company car taxable fuel benefit does not apply in relation to a fully electric car.
Electric vehicles registered after April 1st 2025 incur £10 vehicle tax in the first year. From the second year, the rate will be £195 per year. EVs registered between 1st April 2017 and 31st March 2025 pay the standard rate of £195 per year.
Typically, the employer benefits from the scheme by the associated reduction in amount of Employer National Insurance contributions payable. Also, the employer can reclaim up to 50% of the input VAT on the finance element of the contract hire rental and the full input VAT on the maintenance element.
From a wider perspective, the scheme can incentivise participating employees and demonstrate the employer's commitment to sustainability.
An employee may be advised that salary sacrifice has an impact on their pension contributions and certain benefits based on salary and may affect decisions that are based on salary level, such as those made by mortgage providers and other lenders. The employee may also be advised to consider the costs involved in the scheme and the terms and conditions.