14 May 2023

Electric vehicle salary sacrifice scheme and how it works

There is no denying that driving an electric car is a more environmentally friendly option than using a diesel or petrol engine. But did you know that it could also lower your tax payments?

In this briefing note, BM Connect explains the benefits of the electric vehicle salary sacrifice programme for both the employer and the employee.

What is the electric vehicle salary sacrifice scheme?

The electric vehicle salary sacrifice scheme is a programme that allows employees to obtain an electric vehicle through a leasing arrangement while benefiting from tax and National Insurance savings. Under this scheme, employees agree to give up a portion of their salary in exchange for the use of an electric vehicle. The sacrificed salary is then used to cover the monthly lease payments for the vehicle. Since the salary sacrifice is made before taxes and National Insurance contributions are calculated, employees can potentially reduce their taxable income and lower their overall tax liabilities.

This scheme aims to encourage the adoption of electric vehicles and promote environmentally friendly transportation options.

What are the benefits of electric vehicle salary sacrifice schemes?

There are several advantages to a well-executed electric vehicle salary sacrifice plan for both businesses and employees, including:

Cost savings: Employees can save money by giving up part of their salary in exchange for an electric vehicle lease (a green car salary sacrifice scheme), which can provide significant cost savings compared to traditional petrol or diesel vehicles. The employer can also benefit from cost savings, such as reduced National Insurance contributions.

Environmental benefits: Electric vehicles have lower emissions than traditional vehicles, which can help businesses to reduce their carbon footprint and meet sustainability targets. By incentivising employees to choose electric vehicles through a salary sacrifice plan, businesses can contribute to a more sustainable future.

Attract and retain talent: Offering a salary sacrifice plan for electric vehicles can help businesses to attract and retain talent, especially among younger employees who prioritise environmental sustainability. By offering a range of employee benefits, including electric vehicles, businesses can differentiate themselves from competitors and improve employee engagement and loyalty.

Tax incentives: The UK government provides tax incentives for electric vehicles. Offering a salary sacrifice plan for electric vehicle lease agreements can help employees to take advantage of these tax incentives and reduce their tax liability. Employers will benefit significantly as well, as employer NIC and VAT savings can be significant.

Improved health and well-being: Electric vehicles have several health benefits, including lower air pollution levels and reduced noise pollution. By promoting the use of electric vehicles through a salary sacrifice plan, businesses can contribute to the health and well-being of their employees and the wider community.

What are the tax benefits of offering an electric vehicle salary sacrifice scheme?

Employees who participate in salary sacrifice car plans must pay a benefit-in-kind tax (BiK) on their vehicles each year. When compared to petrol or diesel cars, both fully electric and hybrid models can help your employees save thousands in BiK payments.

The BIK charge for fully electric vehicles is only 2% for the financial year 2022/23, compared to more than 30% for most petrol and diesel vehicles. Furthermore, the 2% rate is set to remain unchanged until 2025.

Hybrid vehicles are taxed at a lower rate as well, though the rate may be higher than 2% depending on the vehicle’s CO2 emissions figure.

The benefit in kind value should be reported through end of year P11D reporting, the value on which the employer would also pay the prevalent Class 1A national insurance contribution to HMRC.  Alternatively, if the employer has formally entered into an agreement with HMRC to payroll benefits in kind prior to the start of the tax year, the PAYE can be collected through the payroll, with Class 1A still payable through P11D reporting.

How does one set up an electric vehicle salary sacrifice scheme?

  1. Update your employees’ contracts
  2. Calculate the BiK payments for company vehicles that are electric or hybrid – You can use HMRC’s Company Car and Fuel Benefit Calculator calculate the appropriate amount of BIK tax to deduct from employee salaries for electric and hybrid company cars
  3. Calculate the effect on your tax and National Insurance contributions – You must determine the benefit’s value for salary sacrifice agreements involving non-cash benefits like electric cars by comparing the higher of: What percentage of the salary was sacrificed? The income tax charge under the standard BiK rules.
  4. Report non-cash benefits to HMRC

Seek professional assistance

Get in touch if you require assistance in setting up a salary sacrifice scheme or with any other aspect of your payroll or bookkeeping.

We can assist you in the following ways:

  1. We can calculate the financial, tax, and NIC consequences for a variety of market-available electric vehicles.
  2. Abide by the reporting requirements that are associated with your payroll.
  3. Make certain that your salary sacrifice plan is tax compliant.
  4. Adjust the plan so that it takes into account charging stations at your place of business and/or at the employee’s house.

It is important to choose the correct vehicle partner for your company green car salary sacrifice scheme and to consider all of the implications for VAT recovery on payments for the lease versus a purchase of the company car.

Contact us for more advice and assistance in setting up your employee salary sacrifice scheme for electric vehicles.

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