Electric Vehicles (EVs) – a good salary sacrifice option?
Electric Vehicles (EVs) – a good salary sacrifice option?
From April 2025, there is a 1.2% increase in employers Class 1 and 1A National Insurance, raising the rates to 15%.
The increase in National Insurance makes salary sacrifice arrangements more attractive for employers as part of their overall remuneration packages for employees. This is especially true since the employer's NIC charge on pension contributions has not materialised and the reduced benefit-in-kind charge for EVs is being extended to 2030.
What are the benefits of EVs?
Implementing a well-designed EV salary sacrifice arrangement will allow employees to save more than a third of the cost of a new electric car and help generate savings in employment costs. It can also help reduce your business’s carbon footprint, demonstrating your commitment to the ESG agenda. This will appeal to employees and prospective employees who are increasingly considering the social and environmental impact of their work and their employers.
How does salary sacrifice for EVs work?
Put simply, an employer acquires an EV, typically under a lease arrangement. The employee gives up salary equivalent to the lease cost, so the employee has offset the cost the employer has incurred.
However, as the salary is given up before PAYE and NIC, the net salary given up is 67% of the actual lease cost for a basic rate taxpayer and 58% and 53% for higher and additional rate taxpayers respectively.
The tax on an EV as a benefit in kind is very low; 13% from April 2025. This means savings for the employee can be substantial. In cash terms, the employee may be benefitting from the use of an EV at a significant discount.
The employer will also benefit significantly as Employer NICs, and VAT savings can also be substantial. Even if you are not prioritising ESG issues or outcomes, the financial benefits of EVs are too important to be ignored.
Government and HMRC's position on EV salary sacrifice
It is not so long ago that HMRC introduced legislation on Optional Remuneration Arrangements to remove some of the tax advantages of using salary sacrifice. However, the use of EVs was specifically excluded from those measures. In other words, HMRC indicated that they did not consider these arrangements to be controversial.
Since then, the Government has also pledged to investment £620 million into grants for electric vehicles and street charging points. It is not yet clear exactly how the £620m funding will be structured and whether employers will be incentivised further to provide employees with electric vehicles (EVs).
The way the company car tax regime was restructured in April 2020 and the recent announcements reflect the Government's ongoing commitment to incentivising employers to provide EV cars.
Advice and guidance on EV salary sacrifice arrangements
Whether you are looking at a single car for an executive, or a wider offering enabling employees to select EVs as their main or even a second car, you need to ensure that the salary sacrifice is effective, the appropriate tax treatments are applied and the correct reporting takes place. There are numerous issues that need to be addressed.
We will help you by;
- Using our salary sacrifice calculator to quantify the tax and NIC and financial consequences across the range of EVs available on the market
- Designing an EV arrangement which provides the best fit for your business
- Finding the right partner to provide the leasing arrangement
- Meeting your associated payroll reporting requirements
- Meeting your National Minimum Wage obligations
- Ensuring your salary sacrifice arrangement is tax compliant
- Personalising the arrangement to look at workplace charging and/or home charging points
- Deliver comprehensive employee communication material on your salary sacrifice arrangement.
How BDO can help
There are many EV providers who will offer an end-to-end service that will provide EVs and manage the fleet (large or small) throughout the life of the lease, often on a no charge basis for employers as their costs are included within the lease charges made.
BDO can offer an independent view on whether an arrangement is the right fit for your business. As a leading advisory business who can provide the relevant tax, VAT and accounting expertise to ensure your business remains compliant and your EV salary sacrifice arrangement truly meets your business needs.
You can download our useful guide to understanding the benefits of salary sacrifice for Electric Vehicles or you can talk to our salary sacrifice experts; Caroline Harwood, Shawn Healy or Mark Seaden.