EV Salary sacrifice schemes come with a range of pros and cons for UK businesses and employees that use them. These schemes allow employees to lease or subscribe to electric vehicles through their salary, offering unique advantages and disadvantages. Even the best electric car salary sacrifice schemes will come with negative features that must be explored before you commit your business to a scheme.
In this article, we delve into the pros and cons of EV salary sacrifice schemes to help you make an informed decision before joining a scheme.
The Pros and Cons of Electric Car Salary Sacrifice Schemes
- Tax and National Insurance Savings
- Access to All-Inclusive schemes
- Discounts on a purchase price
- Low Benefit-in-Kind (BIK) Rates for EVs
- Regular Access to New Cars
- Congestion Charge Benefits
- The Convenience of Workplace Charging
- Reduction in Take-Home Salary
- Reduced Pension Contributions
- Mortgage or Loan Eligibility Considerations
- Limited Vehicle Selection
- Potential Responsibility for Vehicle Upkeep
- Early Exit Considerations
EV Salary Sacrifice Pros in detail
One of the significant advantages of participating in an EV salary sacrifice scheme is the potential for substantial savings through tax benefits.
Salary sacrifice schemes operate on the principle of sacrificing a portion of your gross salary to cover the cost of the electric car. Since this amount is deducted from your salary before income tax and National Insurance contributions are calculated, your taxable income is effectively reduced.
The exact amount of tax savings will depend on your personal tax bracket and the specific salary sacrifice scheme you participate in. However, as per these EV salary sacrifice examples, the potential savings can be significant, particularly for higher earners who fall into higher tax brackets.
Access to All-Inclusive schemes
One of the primary advantages of salary sacrifices is the potential to sign up for an all-inclusive subscription service for your electric vehicle.
With this type of service, all essential aspects of vehicle ownership, including servicing, insurance, electric car breakdown cover, and charging, are bundled together into a single comprehensive package.
This means you don’t have to deal with multiple providers or worry about coordinating different services independently, the subscription service takes care of all the necessary arrangements.
All-inclusive subscription services typically include your annual EV MOT, regular EV servicing and maintenance as part of the package. Electric Car insurance is often included so you don’t have to shop around for separate insurance policies, compare quotes, or worry about finding suitable coverage for your electric vehicle.
Discounts on a purchase price
Participating in an electric car salary sacrifice scheme often allows you to enjoy a significant discount on the vehicle compared to purchasing it outright. This is because manufacturers or dealers are aware of having a guaranteed buyer and can offer considerable discounts, providing you with cost savings.
Low Benefit-in-Kind (BIK) Rates for EVs
Another significant advantage of salary sacrifice is the current BIK rates associated with EVs. BIK refers to the tax that employees pay on the “benefit” of having a company car for personal use. The BIK rate is currently just 2% for electric vehicles in the UK.
Congestion Charge Benefits
The Convenience of Workplace Charging
Many employers with electric car schemes provide workplace charging for employees. This allows you to conveniently charge your vehicle while at work, potentially eliminating the need for public charging and saving you time and money.
EV Salary Sacrifice Cons in detail
Reduction in Take-Home Salary
Committing to a salary sacrifice scheme means a reduction in your take-home salary, as the cost of the electric car is deducted before taxes and National Insurance contributions. This will impact your monthly budget and financial flexibility.
It’s important to carefully assess the impact of this reduction on your overall financial situation. Can you still meet other financial commitments or maintain your standard of living? Also, remember this reduction in take-home salary may affect your ability to save or invest if you are working towards other financial goals.
If you are enrolled in a workplace pension scheme, the reduction in your gross salary due to the salary sacrifice arrangement can also lead to a reduction in the amount contributed to your pension.
Since pension contributions are based on a percentage of your salary, a lower salary means less money allocated towards your pension. This could have long-term consequences for your retirement savings, potentially affecting your financial security in the future.
Mortgage or Loan Eligibility
If you are planning to apply for a mortgage or currently have a mortgage that you will need to renew, the reduced take-home salary resulting from the salary sacrifice scheme can impact your eligibility and borrowing capacity.
Mortgage lenders typically assess affordability based on your income and monthly expenses. With a lower take-home salary, lenders may consider your borrowing capacity to be reduced, potentially affecting the mortgage or loan amount you can secure or the interest rates offered to you.
Limited Vehicle Selection
Electric car salary sacrifice schemes often offer a limited range of vehicle options from specific manufacturers or models. This can restrict your choice, and the preferred electric car you have in mind may not be available through the scheme.
Responsibility for Vehicle Upkeep
While EV lease or subscription schemes may cover vehicle upkeep, not all do. So you may still be responsible for routine upkeep, including servicing, repairs, and insurance. It’s important to consider these ongoing expenses when evaluating the overall cost savings of a salary sacrifice scheme. Double-check with the scheme provider on what’s included!
Early Exit Considerations
Another potential drawback of participating in an electric car salary sacrifice scheme is the limited flexibility and potential challenges associated with early exits for employees. While the scheme may initially seem appealing, circumstances may change, causing early termination of the scheme before the agreed-upon duration.
Exiting the scheme before the agreed-upon duration can result in fees, depending on the agreement in place.
In some cases, employees may want to transfer their salary sacrifice scheme to another employer if they change jobs. However, the transferability of the scheme depends on the policies and agreements between the employer and the scheme provider.
The final word on the pros and cons of electric car salary sacrifice schemes
Electric car salary sacrifice schemes offer a range of advantages and disadvantages. The pros of these schemes include significant discounts on the purchase price of EVs, regular access to new cars, potential tax savings, lower fuel and maintenance costs and workplace charging convenience.
On the other hand, there are cons to be mindful of when considering EV salary sacrifice schemes. These include the reduction in take-home salary, potential implications for other financial arrangements and benefits, limited flexibility for early exits, and the need to carefully evaluate the terms and conditions of the scheme to understand potential obligations and limitations.
Despite the potential drawbacks, the overall benefits of participating in an EV salary sacrifice scheme can outweigh the cons, especially for tax savings and convenience.
If you are considering an EV salary sacrifice scheme, carefully review the specific terms and conditions offered by scheme providers and assess the potential impact on your overall financial situation and obligations.
By fully understanding the pros and cons, you can determine whether an EV salary sacrifice scheme aligns with your circumstances, needs and goals.
Electric Car Guide does not provide tax advice. This article is for informational purposes only and is accurate at the time of writing. Be aware that UK tax legislation may change and you should consult your accountant if you need advice specific to your personal circumstance.
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John is the Editor and Spokesperson for Electric Car Guide.
With over 20 years of writing experience, he has written for titles such as City AM, FE News and NerdWallet.com, covering various automotive and personal finance topics.
John’s market commentary has been covered by the likes of The Express, The Independent, Yahoo Finance and The Evening Standard.