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Salary Sacrifice: What is it and how does it work?

Whether you’re an employee or employer, you might have heard of salary sacrifice. And it’s something you may be considering. But what exactly is it and how does it work in the context of electric vehicles?

Here’s everything you need to know.

What is salary sacrifice?

A salary sacrifice arrangement is an agreement between an employer and employee to reduce the employee’s entitlement to cash pay in return for a non-cash benefit.

This benefit could be an electric car lease for example through an electric car lease salary sacrifice scheme.

The monthly cost of the electric car lease would be taken out of the employee’s pre-tax pay, helping them to save money on tax.

Other examples include pensions and ride-to-work bicycle schemes.

MG4 EV on the road

How does salary sacrifice work?

An electric vehicle salary sacrifice scheme is a super simple process to implement. The employer leases the electric vehicle and offers the scheme to their employees as a perk. The employee would then pay for the car with a portion of their monthly salary before tax. The fact it comes out of their pre-tax pay is crucial, as it cuts the employee’s tax contributions each month.

So, how does that work? As the pre-tax salary is now reduced each month by the cost of the lease, the PAYE and NI is calculated from a smaller overall amount, which means a smaller proportion of the employee’s overall salary is lost to tax.

As an employer, a car lease salary sacrifice arrangement can be set up simply by changing the terms of the employee’s employment contract. Obviously, your employee must agree to this change.

One key legal aspect is that the arrangement can’t reduce the employee’s cash earnings to below the National Minimum Wage (NMW) rates. It is up to the employer to ensure that these rates of pay are maintained.

There is an additional tax that needs to be paid - this is called Benefit-In-Kind or BIK for short, this is the tax an individual needs to pay for the benefit (i.e. the electric car). One of the reasons why EV salary sacrifice is so appealing is because BIK is very low, currently set at just 2% for the financial year 2023/24. The UK government has confirmed that BIK rates will slowly rise, but remain very low compared to ICE vehicles, until at least 2028.

Employee access to affordable EVs

Our modular and innovative approach to electric vehicle salary sacrifice.

Electric car lease salary sacrifice: The key takeaways  

Thinking of putting in place an electric car lease salary sacrifice scheme for your employees. These are the key takeaways:

  • Salary sacrifice for car leasing is set up in the same way as any other salary sacrifice scheme.

  • The employer signs up to the scheme and offers the salary sacrifice car lease as a perk to the employee.

  • The employee gets to drive a fantastic electric vehicle every day – like a Porche Taycan or a BMW iX1 – and lease it from the employer through the scheme.

  • Each month the employee pays the electric vehicle car lease as a salary sacrifice. As mentioned previously this is taken out of their pre-tax salary and reduces the tax they have to pay each in their monthly paycheck.

  • Employees making an electric car lease salary sacrifice can save up to 40% on an electric vehicle of their choice.

Is salary sacrifice worth it?

As an employer, salary sacrifice is a great way to give your employees a perk and show you care about them. And when the scheme involves electric vehicles, it’s also a great way to show that your business cares about the planet too.

Providing a scheme like this to your employees can help you attract and retain talent. In fact, as many as 75% of employees are likely to stay due to an employee benefits package. Employers will also reduce their national insurance contributions, whilst also helping their business hit its sustainability goals.

For employees, it offers a cost-effective way to lease an electric vehicle. As the money is taken from pre-tax earnings, it reduces your tax payments and in some cases can save you as much as 40% on PAYE and NI contributions.

The only slight downside for employees is a reduction in your take home pay each month, but with many people paying out every month on existing car leases, this offers a more affordable and tax-efficient way to do it. Plus, it’s greener too.

Kia Niro EV 3

Learn more about DriveElectric’s car lease salary sacrifice scheme

At DriveElectric, you can lease an electric car through our electric car salary sacrifice scheme.

For employers, it’s a simple process to sign up to the scheme and offer it to your employees. Once an employee signs up, they can choose their electric vehicle and the terms of the lease. It’s then paid for as a portion of their pre-tax salary, at no additional cost to your company.

If you’re an employee considering signing up to the scheme, you simply sign up through your employer. Once you do so, you can speak to our expert team to discuss your needs and requirements.

Simply order your car and we’ll deliver it to you as soon as possible and you’ll be well on your way to a greener, cleaner motoring future. And some tax benefits too.

Why choose DriveElectric?

At DriveElectric, we’ve been at the forefront of the electric vehicle revolution since 2008. You can rest assured we know a thing or two about electric vehicles and electric vehicle leasing.

As we get closer to the ban on new petrol and diesel car sales in 2035, more manufacturers are releasing electric vehicles. You’ll find a fantastic range of electric cars and electric vans available to lease with DriveElectric. Plus, our helpful staff are always on hand to guide you through the process.

We can help you make an informed choice due to our unrivalled expertise and experience in all things EVs.

Simply get in touch with our expert team today.