An EV (electric vehicle) salary sacrifice scheme is a great way to boost your employee benefits and clean up your workforce’s carbon footprint, at zero cost to you as the employer. In fact, an ever-increasing number of fleets have decided to opt for salary sacrifice schemes as a direct replacement to the more traditional company car.
Here we outline the advantages and considerations involved in setting up an EV salary sacrifice scheme for your business, and how the Bluestone team can help.
What is an EV salary sacrifice scheme?
An EV salary sacrifice scheme is an attractive way of providing your employees with a low-cost motivational benefit at no-cost to the employer.
As the employer, you lease an electric vehicle on behalf of your employee. Bluestone Vehicles can help you find a great deal on a vehicle.
You allocate the brand new vehicle to an employee for work and for personal use.
The employee covers the monthly lease payment through their salary, i.e., the amount is deducted from their gross salary before tax and national insurance. The fixed payments cover all motoring costs such as servicing, maintenance, road tax and insurance.
You, the business owner, write to HMRC to let them know that you are offering a salary sacrifice scheme for electric vehicles, explaining how it works and why it’s not tax avoidance.
What are the benefits to you as the employer?
- An EV salary sacrifice scheme is an attractive employee benefit that does not cost your business anything.
- Offering a benefit like this can help to nurture a more engaged and motivated team of employees, increase your staff retention rates and help you to attract new recruits.
- The business may be able to save money on National Insurance contributions and Corporation Tax.
- The new vehicles are fully maintained and insured with all in-life services managed there is no daily involvement from you as the employer.
- Providing employees with new, reliable, safe, and efficient vehicles reduces your Duty of Care risk.
- EV salary sacrifice schemes are fully HMRC and VAT compliant.
- If you are covering some or all fuel costs for your employees’ work-related travel, providing them with more fuel-efficient vehicles should lower your outgoings.
- You will be encouraging the uptake of vehicles with low or zero CO2 emissions which reduces your organisation’s carbon footprint and addresses aspects of your Corporate Social Responsibility.
What are the benefits to your employees?
- Your employee gets access to a brand new car for professional and personal use at lower monthly rates than they would typically be able to access via a private arrangement.
- There are no upfront costs to the employee and a single, fixed monthly payment covers all motoring cost such as servicing and maintenance, road tax and insurance.
- The employee forgoes the cost of vehicle provision from their gross pre-tax salary and as a result pays less tax and National Insurance.
- The employee is able to drive a low or zero emissions vehicle, reducing their carbon footprint.
- When it comes to electric vehicle salary sacrifice there are just three things that an employee needs to pay for.
- Lease cost: This is the cost of the car. Your employer cannot charge you more than it costs them to rent from the leaser. The cost of the rental is deducted from your gross pay.
- Power: For an electric car, you just need to pay for the cost of the electricity required to charge your car. This generally works out at around £2 to £4 per charge on a car with a 250-mile range.
- Tax: The Benefit in Kind tax (BIK) is 1% for 2021/22, and 2% for 2022/23.
What are the potential risks of offering an EV salary sacrifice scheme?
Despite the many benefits, there are some inherent risks to the employer and employee with salary sacrifice schemes which should be considered carefully.
Potential risks to the employer
- There may be some risks around employee redundancy, resignations, terminal illness, parental leave, etc. For example, where an employer pays the statutory minimum during parental leave, they will be expected to offer the same level of benefits although they cannot make the same deductions from pay.
- Should the employee leave your company, you will need to reallocate the vehicle to another member of staff, or cover the repayments as a company and use it as a shared vehicle.
- In the case of parental leave, where an employer pays the statutory minimum, employers are required to offer the same benefits, despite not being able to make the same level of deductions from the employee.
- Consideration should also be given to employees nearing retirement to ensure deductions do not adversely affect pension contributions or provisions based on their salary when they retire.
There are ways to reduce these risks such as adding a premium to the monthly vehicle cost or setting up the scheme to include an early termination fee to be paid by the employee.
Potential risks to the employee
- Once the employee agree to a salary sacrifice scheme they are locked in for the duration of the contract, unless they leave your job. At which point they’ll have to give the car back.
- Because the cost of the car is taken from their salary, there is no flexibility if they can’t afford to make the payment.
- The employee’s net salary will also be lower, which could affect their ability to get mortgages, loans or other forms of finance and could impact the amount of maternity/paternity pay they are entitled to.
- As the car is leased they will have to give it back at the end of the contract and they’ll either need to start a new salary sacrifice agreement or fund a new car via an alternative method.
- Salary sacrifice is unlikely to work for those on low incomes, as their take home salary is not allowed to fall below the national minimum wage.
Why choose EVs over traditional vehicles?
Aside from the clear environmental benefits, a greener fleet can help you cut costs, save money, and can make a business look more environmentally engaged, improving your reputation and brand image.
Ultra-low emission vehicles (ULEV) emitting up to 75g/are particularly well suited to salary sacrifice as they are exempt from recent changes that saw salary sacrifice schemes subject to the same tax treatment as cash income.
Where private use of a company car is permitted, the less CO2 a vehicle emits from its tailpipes – in other words the more fuel efficient it is – the lower the Benefit In Kind (BIK) tax bracket that car will attract.
EVs and PHEVs are generally more expensive to buy than their petrol or diesel counterparts. However, government grants have subsidised the cost of such vehicles. Private buyers and fleet customers are both eligible for the grant which has increased to 35% of the vehicle cost to a maximum of £5,000 as of 1 April 2015.
The criteria vehicles need to meet in order to be eligible for the grant include;
- CO2 emissions must be 75 g/km or less
- EVs must have a range of at least 70 miles
- PHEVs must have a minimum all-electric range of 10 miles
- A vehicle’s top speed must be at least 60 mph
If the higher purchase cost of EVs and PHEVs is a drawback, leasing could be a more affordable alternative for going green. Leasing also withdraws the uncertainty about vehicle resale value, and their low running costs keep monthly bills down. Green cars also qualify for 100% leasing allowance which makes them highly tax efficient if you choose to contract hire.
Lower running costs
The average cost of covering 100 miles in a petrol or diesel vehicle stands between £12 and £18. To fully charge an electric vehicle and cover the same distance costs around six times less at £2 to £3.
Fluctuating fuel prices also means that greater savings could be enjoyed by switching to an EV. In addition, all current EVs and PHEVs are exempt from the daily London Congestion Charge of £11.50 as well as Vehicle Excise Duty (VED). The combination could give owners an annual saving in excess of £3,000 if journeys into the capital are made on a regular basis.
Choosing the right vehicles for your scheme
If you’re thinking about going green you’re now spoilt for choice in terms of what types of vehicles are available. Hybrids, pure electric vehicles, plug-in hybrids, range extenders, and fuel cell vehicles now make up the core of green cars on offer to businesses.
Electric Vehicles (EVs)
Bespoke electric vehicles are designed from to run solely on electricity.
A conventional hybrid uses a conventional petrol or diesel engine as well as a small battery powering an electric motor. At lower speeds or when in traffic, the car will run purely on electricity, while the engine will start up and provide power during faster driving and under hard acceleration. When the energy from the electric motor has been depleted, the petrol engine will also charge the battery on the move so it is always topped up for when you need it.
Plug-in hybrid electric vehicle (PHEV)
Plug-in hybrids employ a similar concept to hybrids, using a conventional petrol or diesel engine, but they also use a much larger battery and electric motor. Another difference, as the name suggests, is that they can also be plugged into the national grid to keep the larger batteries charged.
Range Extenders (REX)
The powertrain of both cars is made up of a petrol engine as well as a battery and an electric motor, but rather than the engine powering the vehicle itself, it acts as an on-board generator to keep the batteries powering the electric motor topped up.
Fuel Cell Vehicles (FCV)
Fuel cell cars use hydrogen to power an on-board fuel cell, which combines with oxygen in the air to produce the electricity which powers the car. Fuel cell vehicles produce only water as a by-product and emit no CO2, so are classed as zero-emission cars.
Which is best suited to me?
While there is a lot of choice, it’s important to take into consideration how you will be using the car. Will you be making longer motorway journeys or mainly doing inner city driving?
EVs are best suited to city driving as they don’t have the long distance range of plug-in hybrids. The batteries in EVs also work more efficiently at lower speeds but are also capable of covering longer distances if required.
While EVs are more capable for day-to-day use than their reputation gives them credit for, PHEVs and REXs will be more suited to those who spend extended periods of time on the motorway. They are more flexible in terms of their usability as, unlike an EV, they do not necessarily have to be plugged-in to the national grid to be charged.
Setting up your scheme
When you have decided on the EVs that you want to use in your scheme she next step would then be to decide if you will be buying or leasing the vehicle. As previously mentioned, the higher cost of purchasing a green vehicle makes leasing an appealing proposition. Over a 3-year leasing period, monthly payments tend to be lower, you have the security of the vehicle being under the manufacturer’s warranty, and the uncertainty of the vehicle’s residual value is eliminated.
However, businesses are entitled to 100% writing down allowances for vehicles that emit less than 75g/km of CO2, which is the main appeal for buying a ULEV (Ultra Low Emitting Vehicle) outright. For cash rich companies, this can be highly attractive. For companies that prefer to lease, the cost of the lease and any disallowed VAT can be set against taxable profits.
While we are not able to set up an EV salary sacrifice scheme for you, we can help you to source the right vehicles and set up a cost-effective and tax-efficient leasing arrangement for your business.
If you are interested in leasing EVs for a salary sacrifice scheme or company car scheme, contact our specialist vehicle leasing team today on firstname.lastname@example.org.
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