As the demand for electric vehicles (EVs) continues to grow, the big question on buyers’ lips is no longer “Do I want an EV?” but “I want an EV but how I am going to pay for it?”.
More and more electric models are becoming available in all shapes and sizes, from almost every car brand in the UK market. And although prices are still high compared to equivalent petrol or diesel cars, they are coming down. Combined with specific financing options that favour EVs, it’s entirely possible (depending on your circumstances) that you could get a new EV for a similar price to a comparable petrol car – plus enjoy the lower running costs that go with it.
Salary sacrifice vs traditional car finance
If you buy a new EV outright, or finance it using a traditional car finance product like a personal contract purchase (PCP), you are essentially paying a lot more for the car and banking on low running costs to offset the high price. If you’re leasing a car through a personal contract hire (PCH) leasing contract, it’s much the same thing.
In most cases, however, there’s still a higher overall cost in choosing an electric car than an equivalent petrol (or diesel) one. Even if you spend a lot on filling up with petrol or diesel each month, it’s tough to make the sums work in favour of an EV in an outright purchase or via conventional finance methods.
Which brings us to salary sacrifice.
The government-backed salary sacrifice scheme (often referred to as ‘sal-sac’) allows employees to reduce their cash earnings in return for a non-cash benefit, including a car. Because the deduction is made before income tax is applied, the scheme can represent a significant saving over a normal finance product, which you pay for from your after-tax salary.
But that’s not the end of the story. You can have a petrol or diesel car on salary sacrifice if you want, but what makes it particularly advantageous for electric cars is something called benefit-in-kind (BiK) tax.
If you are provided with a car through a salary sacrifice scheme, you have to pay BiK tax on the value of that car. But the amount of tax isn’t a flat rate like VAT – it depends on a combination of the car’s CO2 emissions and its overall price.
For a car that produces zero CO2 emissions (in other words, an EV), you pay only 2% in BiK tax. This is then multiplied by the car’s value (a particular number called the P11D value), multiplied by your income tax banding (20%, 40% or 45%).
By comparison, a petrol or diesel car could have a BiK tax rate of up to 37%, which could potentially equate to a difference of hundreds of pounds per month once you multiply it by the car’s P11D value and your income tax banding.
The net result of this is that salary sacrifice, while possible, is not usually advantageous for a petrol or diesel car compared to other finance methods. But if you want an electric car, you could end up paying much the same or even less – despite the car being much more expensive to start with.
So, all good news, right? Well, mostly. But there are some things you need to bear in mind.
A more complex set of numbers
Understanding how salary sacrifice works, and how much a given car actually costs compared to other forms of payment, can be confusing. This can put off many drivers – and their employers – from even investigating the idea.
If you want to find a PCP or lease deal on a given car, you can see results from any number of providers very easily. In fact, here at The Car Expert we work with several of the UK’s top leasing providers so you can get a quote on almost any new car in seconds.
Salary sacrifice is more complicated, and trying to find out equivalent numbers has traditionally been more difficult – largely because you need to factor in your own salary situation to generate a quote. For any three different people, the same car from the same provider could cost three different amounts of money, which is a very different concept to get your head around.
It also requires your employer to be part of the process, which can be a barrier for entry – especially if you work in a small business.
Traditionally, salary sacrifice programmes were usually only offered by large companies with hundreds of employees. Today, however, every very small SMEs can be part of a salary sacrifice programme.
What are the benefits of salary sacrifice?
There are benefits for both employees and employers from sourcing an electric vehicle through a salary sacrifice programme.
For the employee, the main benefits are:
- Lower monthly payments than other types of finance
- No up-front deposit required
- Insurance, servicing, road tax and breakdown assistance can usually be included
The most obvious advantage is the lower overall cost, both in terms of reduced monthly payments and not having to find thousands of pounds up-front like you would with a PCP or PCH agreement.
Bundling in your other on-road costs may be helpful, or you may prefer to manage those separately. For example, if you have a multi-car insurance policy already, it may be cheaper to stick with that rather than run separate policies for each car in your household.
For employers, the main benefits are:
- Savings through lower national insurance (NI) contributions
- Attractive staff perk to help attract and retain employees
Because the car is paid from an employee’s gross salary, this reduces the company’s NI contribution. Depending on the number of employees using the scheme, this could be a small saving for your business or a much larger one.
More subjectively, having a salary sacrifice programme on the books makes a company more attractive for both new and existing employees. If they can save hundreds of pounds a month on their car bills, it’s like giving them a pay raise without any cost to your business.
What are the disadvantages of salary sacrifice?
Unsurprisingly, you can’t have a load of advantages and dramatically cheaper prices without some negative factors. So what are they?
For employees, the negatives are:
- Gross salary is reduced, which affects holiday and pension pay
- Potential liabilities if you leave the company or need to terminate the agreement
- You can’t choose from different providers like you can with a normal lease
Because your salary is reduced to account for the car, it affects other calculations that are also determined by your salary – mainly things like your holiday pay, overtime rates and pension payments. While the savings in terms of your car payments will almost certainly outweigh any loss in holiday or overtime pay, pension is an investment in your future so you may want to consider upping your personal pension contribution to make up for any shortfall.
Different salary sacrifice providers may have different terms and conditions about ending your contract early, so you should check what your liabilities may be if you resign or get fired or take maternity leave or lose your licence, and so on.
Because the salary sacrifice programme is set up by your employer, you’re stuck with whoever that is. Some providers havce more favourable T&Cs than others, but you can’t choose your own provider (like you can with normal leasing) for a more favourable company.
For employers, the negatives are:
- The company is responsible for leasing the vehicle, rather than the employee
- Company has to manage the programme for its employees
- Potential liabilities if employees resign, are on long-term leave or are made redundant
In a sal-sac environment, the company leases the car and provides it to the employee, like a company car set-up. That means that the company is ultimately responsible for it, which means paying for the vehicle and managing the programme. In a large company with lots of employees taking cars on salary sacrifice, that can be quite a workload. Depending on the circumstances, the company may also end up being stuck with the vehicle if the employee leaves the business.
Salary sacrifice providers have provisions for various scenarios to protect the company as well as the employee in the event of an early termination of the agreement, or the company may be able to allocate the vehicle to another employee, but the company will need to do its homework to make sure it is comfortable with the T&Cs of the programme.
Balancing the pros and cons
For a petrol or diesel car, salary sacrifice is no longer as popular as it used to be because the taxation system no longer offers any significant advantages. For EVs, however, it’s a very different situation.
The very low BiK rates for electric cars mean that drivers can potentially get behind the wheel of an EV for a similar cost to a petrol car, but still enjoy the lower running costs and environmental benefits of an electric car.
The added complexities of salary sacrifice schemes mean you need to take your pay situation into account to work out exactly how much a car is going to cost you, which is more of a faff than simply looking up leasing offers on the same car. Depending on who your company’s salary sacrifice provider is, this may be relatively simple or laboriously complicated to achieve.
You’re also limited by which provider your company uses for its sal-scheme, or whether your employer even operates a scheme at all. Like regular leasing, some companies have more restrictive T&Cs than others, and also different vehicles available. But unlike regular leasing, you can’t pick and choose who to use to supply your vehicle.
For employers, there is more responsibility to manage the scheme and the vehicles. The benefits are lower NI payments and an effectively cost-free pay rise for employees using the scheme instead of leasing an electric car with their after-tax salary.
As more new providers move into the EV salary sacrifice marketplace, they are bringing new ideas and energy. Some of the new players are very active in managing the proccess for companies, making life easier for everyone and reducing the barriers to entry. They are also actively chasing smaller companies to enrol in salary sacrifice programmes, bringing the opportunity to drive an EV for less money to far more people.
- More salary sacrifice information and advice at The Car Expert
- The Car Expert’s car finance hub – your go-to guide for every type of car finance available
Additional reporting by Tom Johnston