Electric car salary sacrifice schemes: what are they and should you use one

Salary Sacrifice schemes are all the rage, and judging by the latest statistics from the British Vehicle Rental and Leasing Association (BVRLA), enthusiasm for this potentially tax-efficient method for employees to get behind the wheel of a new electric car shows no sign of waning.

The BVRLA’s latest report reveals Salary Sacrifice take-up has increased 63 per cent year-on-year, while Personal Contract Hire numbers are down. Indeed, with all cars on the scheme considered ‘fleet registrations’ in official industry figures – because they’re usually delivered through lease deals to companies – some think it’s adding to the false impression that private buyers are not engaged with the EV transition.

Fiona Howarth, CEO of Octopus EVs, recently highlighted the possibility that many Salary Sacrifice registrations are actually replacing private finance deals, as consumers reap the benefit of the tax break.

“Salary Sacrifice cars are on the driveways of typical drivers – they’re used for the school run and weekly shop, so why should they be counted as fleet cars? It’s the cheapest, easiest way to go electric and Octopus is delivering 1,000 cars every month, with orders up 40 per cent on last year,” Howarth says.

Mike Hawes, chief executive of the Society of Motor Manufacturers and Traders, which compiles the official figures, says: “New vehicle data covers all vehicles registered by the DVLA in the UK for any given month. It is broken down into a number of categories such as vehicle type, powertrain and, where possible, type of sale – private, business, fleet.

“Salary Sacrifice registrations are not listed separately as there is currently no official way to measure them, as neither HMRC, the DVLA or scheme operators provide this data.”

The SMMT says it is trying to address what it calls an important gap in the data, but meanwhile there’s a broad consensus that Salary Sacrifice schemes must continue to be supported. “Salary Sacrifice is helping accelerate EV uptake, and must be maintained together with long-term certainty on benefit-in-kind rates,” Hawes adds.

Is Salary Sacrifice right for you?

One of the UK’s most forward-thinking Salary Sacrifice providers is Octopus, which runs its own scheme to get drivers into tax-saving EVs – and simultaneously hooked up to its Intelligent Go money-saving electricity tariffs via an inclusive wallbox charger.  

Octopus EV’s chief operating officer Oliver Boots explains: “Everything you need to to stay on the road comes out of your pre-tax or gross salary, and it works because it's not as though you’re avoiding tax altogether on your car, but the rate of tax is lower than it would be for income tax.” 

Octopus only offers EVs on its scheme, for which the benefit-in-kind tax rates fixed by the government are currently 2 per cent, rising to 5 per cent in 2028. However Boots says Octopus projections show benefit-in-kind rates have to reach 20 per cent before a Salary Sacrifice car would typically become disadvantageous compared to paying income tax – and as a result there are rival firms offering plug-in hybrids as well as EVs on similar schemes.

“Depending on how much you earn, how much tax you pay today and what tax band you’re in, there are more savings,” says Boots. “The more tax you pay, the more you can save through Salary Sacrifice.” That’s especially true if a Salary Sacrifice scheme takes your income into a lower rate tax band, which could bring associated benefits like exemption from the Child Benefit Charge.

Employers too, see benefits, including not having to fork out national insurance contributions on the salary you’ve ‘sacrificed’ to fund your new EV. Some will even share this NI saving with employees.

What are the downsides?

There’s a range of reasons why Salary Sacrifice may not work for you. Any scheme that would take your income below the minimum wage is not permitted, and in other cases it may be that directing Salary Sacrifice sums towards a pension would be a far more efficient way to go.

Another gripe we’ve heard is that the savings are not always as good as drivers think they ought to be, with certain scheme providers’ monthly charges suggesting they’re gouging drivers by effectively pocketing a slice of the tax-break as profit.

It can get complicated ‘doing the maths’ because schemes may also include insurances protecting employers as well as the driver – for example if a lease car is returned early due to employment termination – but we’ve heard from quite a few drivers who think Salary Sacrifice quotes they’ve been offered are not much better than private finance deals they could arrange themselves. 

Unfortunately too, you can’t shop around, as you’re only free to use the scheme/lease partner that your employer adopts. Indeed the BVRLA told us “it’s up to employers to do the shopping around”, and they should be looking at a range of factors including price, vehicle availability and choice, plus the level of service provided.

Bear in mind, too, that on a Salary Sacrifice scheme you don’t have the same consumer rights if you want to reject a vehicle as you might under a standard lease or PCP scheme. 

“It comes down to what is in place between the lease company and the employer, and then separately between the employer and employee,” the BVRLA says. “Suppliers may use this as a point of differentiation, but the important thing is the end user has clear communications and fully understands their own responsibilities and those of their employer and the vehicle provider.”

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