Salary sacrifice schemes allow employees to lease or subscribe to an electric car through their salary, with the advantage of potential tax savings.
However, circumstances change, and there may be instances where terminating the salary sacrifice agreement for an EV becomes a necessity.
Let’s explore the key considerations, potential implications, and available options when faced with the need to end your EV salary sacrifice agreement early.
Are there fees if I cancel my salary sacrifice agreement early?
There can be fees associated with cancelling a salary sacrifice agreement early, depending on what arrangement your employer has with the provider of the vehicle.
Depending on the arrangement an employer may have negotiated terms that offer more flexibility or they may have taken out early termination protection (more on that below!).
Also, the fees can vary depending on whether the agreement is with an EV leasing firm or an EV subscription firm:
EV leasing salary sacrifice early termination fees
In the case of EV leasing salary sacrifice schemes, most companies require an early termination fee if the agreement is ended before the agreed-upon end date.
These fees are in place because EV leasing contracts typically span between 1 and 5 years, and the leasing companies aim to recoup their costs.
The specific amount of the early termination fee varies depending on the company offering the scheme and the timing of the termination. Typically, the fee is calculated as a few months’ worths of payments, with the exact number of months decreasing the further into the contract you are.
Alternatively, the fee could be a one-time lump sum or a percentage of the remaining balance. For example, terminating within the first year may result in a fee equivalent to 5 months’ worth of payments, while terminating within the second or third year could lead to 3 or 1 month’s worth of payments.
EV subscription salary sacrifice early termination fees
On the other hand, EV subscription services often offer more flexibility. Some subscription companies allow for cancellation with just one month’s notice, and therefore, the early termination fees for EV subscription firms can be as little as one month’s payment.
Generally, EV subscription services cost more than a lease agreement, so you are paying for that contract flexibility.
What is early termination protection?
Employers have various options when setting up salary sacrifice schemes to ensure both their business and employees are protected, particularly in the event of early termination. The best EV salary sacrifice schemes will provide comprehensive early termination protection to safeguard both businesses and employees from unexpected expenses.
Maternity, paternity, or sick leave
EV salary sacrifice providers understand that having an employee on long-term leave can present challenges. Schemes may offer protection for employees who are on maternity, paternity, or sick leave.
When this happens, employers can continue making payments for the car as agreed. Then once the employee returns to full-time work, the provider offers a credit against the employer’s account for the corresponding period, providing financial relief.
Early return policies
Some EV salary sacrifice providers offer employers the benefit of early return protection. This means that employers can return a specified number of cars each year, free of charge.
This means that employers don’t need to worry about unused electric company cars sitting in the car park. This flexibility allows employers to send the cars back to the provider at no additional cost, helping to manage the fleet effectively.
Redundancy, resignation, or dismissal
Early termination protection should also cover situations when an employee leaves the company, whether due to redundancy, resignation, or dismissal.
In this situation, employers can return the employee’s car to the provider.
What happens if you leave a company with salary sacrifice?
What happens when you leave a company where you have an electric car as part of a salary sacrifice scheme? Well, that depends on the exact terms of your contract, but a few possible scenarios are:
- Return the Vehicle
What might happen is that you will just have to return the vehicle to the leasing company or your employer when you leave the job. The lease on the vehicle is often tied to your employment, and leaving your job early usually means the end of the salary sacrifice scheme.
- Early Termination Fee
If you leave before the end of the lease term, you may have to pay an early termination fee. This could be a significant cost depending on the specifics of the agreement.
- Continuing the Lease or Subscription
In some cases, it might be possible to take over the lease payments yourself and keep the vehicle. The ability to do this would depend on the specifics of the contract and your personal financial situation.
- Transferring the Lease or Subscription to your new employer
Agreements may allow you to transfer the contract to another business (or even an individual within your household). Again, this is not always possible and would depend on the specifics of the EV agreement.
The specific details of what will happen when you leave a job while participating in a salary sacrifice scheme for an electric car will depend on the terms and conditions set out in your employment contract and the lease agreement for the vehicle
Questions to ask your salary sacrifice provider to protect you from early termination fees
When it comes to the early termination of a salary sacrifice agreement, you need to understand the terms, conditions, and potential implications thoroughly, this should help protect you from surprise costs.
Here’s a list of key questions you can ask before entering into a salary sacrifice agreement:
- Are there any penalties or costs associated with the early termination of the agreement?
- What are the expectations related to the maintenance of the EV upon early return?
- Is there an option to take over the lease personally and continue payments if you leave the company?
- How does the agreement address situations like redundancy, resignation, or long-term sick leave?
- How are damages to the vehicle handled, especially in the case of early termination?
- Are there any mileage restrictions or penalties for exceeding a certain mileage?
- Does early termination affect your credit score or have other financial implications?
- Is there any provision to transfer the lease to another individual, for instance, a new employee or a third party?
- What happens if you wish to buy the vehicle as part of an early termination?
- What happens if the vehicle is involved in an accident? Who is responsible for the breakdown recovery or insurance coverage and what are the deductibles?
- What are the circumstances under which the agreement can be renegotiated or altered?
The final word on the early termination of salary sacrifice schemes
Early termination of salary sacrifice agreements can be particularly complex, often involving financial penalties or specific conditions.
Therefore, being well-prepared and asking the right questions before entering into an agreement is crucial.
Consider factors such as the conditions and exceptions of the early termination clause, handling of events like parental leave or redundancy, and the worst-case outcomes for both parties involved.
Understanding your rights, responsibilities, and the specific details of your agreement will help ensure that you’re not caught off guard by any unexpected issues or costs. If you’re ever unsure, don’t hesitate to seek professional advice.
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.