How Does Salary Sacrifice Work?

If you're looking to get an electric car in the UK, you might have heard about salary sacrifice schemes. These schemes can make driving an electric car more affordable. Let's break down how it works in a simple way.

What is Salary Sacrifice?

Salary sacrifice is a way to pay for things directly from your salary before tax is taken out. You agree with your employer to give up a part of your gross salary in exchange for a benefit.

In this case, the benefit is leasing an electric car. Because the money comes out of your salary before tax, you end up paying less tax and National Insurance.

How Does it Work for Electric Car Leasing?

Here's a step-by-step guide to how salary sacrifice for electric car leasing works:

  1. Choosing a Car: Your employer will agree to join the salary sacrifice car scheme. You can then visit our website and pick the electric car you want.

  2. Agreement with Your Employer: You and your employer agree to reduce your salary by an amount that covers the cost of leasing the car you have chosen. This reduction is usually for a fixed term, often between 2 to 4 years.

  3. Lease Payments: The lease payments for the car are taken directly from your gross salary. This means the amount you agree to sacrifice comes out before any tax or National Insurance is calculated.

  4. Tax Savings: Because the lease payments are taken before tax, your taxable income is lower. This means you pay less income tax and National Insurance.

Example

Imagine you earn £30,000 a year and decide to lease an electric car for £300 a month through salary sacrifice. Here's how it might look:

  • Before Salary Sacrifice: Your annual salary is £30,000.
  • After Salary Sacrifice: You agree to sacrifice £3,600 a year (£300 x 12). So, your taxable salary becomes £26,400.

By reducing your taxable salary, you pay less tax and National Insurance. This can make the cost of leasing the car cheaper than if you paid for it with your post-tax salary.

Benefits of Salary Sacrifice for Electric Cars

  1. Cost Savings: The biggest advantage is the potential savings on tax and National Insurance. This can make leasing an electric car much more affordable.

  2. Environmental Impact: Electric cars are better for the environment. By choosing an electric car, you're reducing your carbon footprint.

  3. Lower Running Costs: Electric cars typically have lower running costs compared to petrol or diesel cars. They are cheaper to charge than to fill a tank with fuel, and they have fewer moving parts, which means lower maintenance costs.

  4. Government Incentives: The UK government offers incentives for electric cars, like grants for installing home chargers and lower Benefit-in-Kind (BiK) tax rates for electric company cars.

Things to Consider

  1. Impact on Salary: Reducing your salary means you might have less take-home pay. Make sure you can still afford your other expenses.

  2. Commitment: Salary sacrifice agreements are typically for a fixed period. If you leave your job, you may have to pay an early termination fee or continue making payments.

  3. BiK Tax: While the BiK tax rate for electric cars is low, it’s still something to consider. This tax is calculated on the value of the benefit (the car) you receive.

Conclusion

Salary sacrifice can be a great way to afford an electric car in the UK. By sacrificing part of your salary, you save on tax and National Insurance, making the cost of leasing the car lower. Plus, you get the benefits of driving a clean, green vehicle. Just make sure to consider the impact on your take-home pay and the commitment involved.

By understanding how salary sacrifice works, you can make an informed decision about whether it's the right option for you to lease an electric car.