Michael loves his new car. “Driving an EV is a revelation,” he says.
As his four-year-old Audi RS6 reached the end of its lease, the chartered accountant from Oxfordshire, who asked us not to use his surname, says he was increasingly unhappy with its fuel-hungry, noisy V8 engine — “and my wife hated it”.
He wanted a Porsche, but his wife vetoed it: “She used to say she would divorce me if I bought a Porsche”. Then in April, he bit the bullet, leasing a Porsche Macan — its saving grace being that it is an electric vehicle. “The only way I could make this acceptable,” he says.
In just a few weeks, he’s sold on the technology, but he says what really convinced him to make the switch was an extraordinary tax saving.
His brand new Macan costs him just over £1,300 per month after tax to lease, leaving him £900 better off than when leasing his old Audi RS6. It “made going EV worthwhile,” he says. And it meant a sizeable tax saving, since he got the car through salary sacrifice, which allow workers to reduce their taxable income in exchange for a perk.
In recent years, generous government subsidies for EVs and frozen tax thresholds have dramatically increased the appeal of using salary sacrifice to drive electric. In the last tax year, around one in five of all EVs registered in the UK were leased via salary sacrifice, according to analysis shared with FT Money by the British Vehicle Rental & Leasing Association, a trade body.
In years gone by, EV salary sacrifice was “a bit of a niche product”, says Tom McLennan, director of policy and public affairs at BVRLA. But in 2020, the government turbocharged the schemes by setting the tax rate for EVs purchased as company cars at 0 per cent — compared with rates as high as 37 per cent for petrol and diesel. (The “benefit in kind”, or BIK, rate for EVs is currently 3 per cent and will rise to 9 per cent in 2029-30.)
In 2018-19, fewer than 2,500 EVs were registered as company cars — which include those hired via salary sacrifice — according to HMRC. By 2022-23, that figure had risen to 220,000.
Given its rapid rise in popularity, FT Money asks: is EV salary sacrifice right for you?
For FT reader Jon Wingfield, EV salary sacrifice was a “no-brainer”. He took out his first car on the scheme in 2021 and hasn’t looked back.
Wingfield says he “wanted a low-risk way to dip my toe in the EV market” and that EV salary sacrifice — in which vehicles are provided on lease — offered the perfect opportunity for that.
He took out a Polestar 2 on a three-year scheme with Tusker, the provider his employer had paired with. “It was the best car I ever [had],” he says.
For just over £850 a month, he got the car, insurance, servicing and redundancy cover. Bonuses often took his yearly pay over £100,000 a year, so the tax relief afforded by the vehicle proved useful. Above that amount taxpayers see their personal allowance tapered away, meaning anyone earning between £100,000 and £125,140 faces a marginal tax rate of 60 per cent.
For parents of young children, the situation is even worse. In England, if one parent’s net adjusted pay tops £100,000, they lose valuable free childcare benefits. Earn more than this, and a parent of two children at a London nursery would need to earn £149,000 — a pay rise of nearly 50 per cent — to compensate for the loss, according to calculations by the Institute for Fiscal Studies.
FT reader Alex Ross opted for EV salary sacrifice for this very reason. “We have an almost two-year-old in nursery and would be heavily impacted by losing the free hours and tax-free childcare,” he says.
To people in Ross’s position, salary sacrifice offers an attractive proposition: forgo a portion of your income in lieu of a benefit, such as increased pension contributions or a company car — and reduce your taxable earnings below the £100,000 cliff edge (but be warned, this will not work in Wales, since the threshold is based on gross salary, rather than net adjusted pay). The opportunity is also alluring for employers, who can reduce their national insurance contributions, which rose in April.
Companies increasingly recognise the importance of workplace perks in retaining employees and an industry has sprung up to service them. Wingfield says that when he moved jobs this year his new employer’s EV salary sacrifice scheme was “one of the driving factors” that sealed the deal.
When you lease a car on salary sacrifice, you’re hiring it for an extended period. This means your costs tend to be lower than in a “personal contract purchase” (PCP) agreement, in which the money you pay gives you the option to buy the car at the end of the contract.
But the monthly payments you’ve made during the course of the scheme won’t build you up any equity — and there may be a penalty to pay if the provider deems that you have damaged the car.
EV salary sacrifice schemes are run by external leasing businesses, which pair up with employers to offer vehicles for staff to choose from.
The Electric Car Scheme, Octopus Electric Vehicle and Tusker are among the providers that have set up shop as EV salary sacrifice providers.
Octopus EV, which launched in 2021, currently offers 98 different vehicles on its website, ranging from the everyday Omoda E5 to the luxury Lotus Emeya sports car (for disclosure, Octopus EV is the provider for FT employees).
The company estimates that if a 50-year-old, 40-per-cent taxpayer were to get a BMW iX1 electric car on a four-year personal contract hire scheme, it would cost some 16 per cent more than the equivalent petrol vehicle — the BMW X1.
But buy the EV on salary sacrifice, and it works out roughly a fifth cheaper than the petrol car, completely reversing the calculus.
The saving is in line with what you might expect, says Nick Bustin, employment tax director at chartered accountant HaysMac. Typically, EV salary sacrifice saves you between 20 to 50 per cent, he says.
An important element of that saving comes from the reduced company car tax for the electric car. The government has massively reduced the BIK tax paid on EVs, compared to petrol or diesel-powered vehicles.
Salary sacrifice also surmounts another barrier for those considering an EV: though they have much lower running costs and tend to require less maintenance, electric cars tend to be more expensive upfront than their petrol counterparts. By leasing the vehicle — though of course they never own it — motorists pay only for the value lost over three or so years, instead of the full cost of the car.
“It’s particularly good for some of those cars higher earners are going for,” says car leasing expert Jim Starling, who runs the YouTube channel Definitely Not A Guru. He says that the pricier EVs favoured by higher earners tend to lose value faster. “If you buy them, you have to soak up that depreciation, but on a lease, it’s not so bad.”
It’s important to scrutinise the packages on offer carefully, Starling adds. “It feels like the Wild West at the moment.” He gives the example of a viewer who contacted him last month to share that he had two quotes from the same provider, but with different employers. “One was from his employer and one was his wife’s. There was £100 between them [per month] and they were for literally the same thing.”
Ultimately, you’re restricted by the salary sacrifice provider your employer has chosen and the deals they offer. Schemes often include other benefits as part of the monthly leasing fee, such as insurance, maintenance and servicing, breakdown cover and tyre replacement.
It’s important to see which of these perks are included as part of your scheme, and which you will have to fork out for yourself, as they can make a big difference to affordability.
There are other drawbacks too. EV salary sacrifice can affect your pension benefits, depending on how it’s calculated. FT reader Hugh Parker, a teacher, “seriously considered” using the scheme when his school introduced it. But he says that “not long after launch”, the school realised that members of the Teachers’ Pension Scheme who signed up to EV salary sacrifice “would get significantly smaller pension contributions”. The TPS is a defined benefit scheme, meaning that contributions and retirement payouts are calculated based on taxable income.
“People should be speaking to their employer and asking how it affects their pension contributions,” says Starling.
It’s also important to check what happens if you leave your job or are made redundant. FT reader Scott had to pay an early termination charge — equivalent to four months’ worth of lease payments — when he resigned from his job at a Big Four accounting firm. He says that while he was aware of the charge before he entered into the scheme, “details about how it would apply were not made clear”. While lease payments were taken before tax, the termination charge was applied post tax, leaving him to foot a higher bill.
Scott adds that even during the scheme, he struggled to predict how salary sacrifice would impact his take-home pay. His pay hovered “around the £100,000 to £125,000 range where income tax gets complicated,” he says. “Adding the lease into the mix seemed to play havoc with my PAYE tax codes and my monthly take-home ended up quite unpredictable.”
His experience led him to decide against leasing in future — he has now returned to a second-hand petrol vehicle that he’s bought outright. “The clarity of information provided before entering into the lease leaves a lot to be desired,” he said.
By 2030, the government requires EVs to make up 80 per cent of most carmakers’ annual sales, rising to 100 per cent by 2035.
There remain a host of challenges in reaching that target, ranging from patchy charging point coverage, a lack of connector standardisation and concerns about EV range.
And while some might be happy to wait with a coffee as their vehicle charges, others are quite reasonably wary at the prospect of standing around late at night in a refuelling station.
Salary sacrifice has proved successful in addressing concerns about the upfront cost of electric cars, but its future beyond 2030 is uncertain.
So what’s next? Experts and industry figures say it is inevitable that BIK rates for EVs will have to rise as electric cars become more prevalent on the roads.
“Over the last 25 years, both [road tax] and BIK have always had an environmental element,” says James Court, director of public policy at Octopus EV. He says he is “already starting conversations with government [about] what happens to that regime post-2035”.
He expects further rises to BIK, but notes that there is a ceiling which, if exceeded, “will kill off [EV salary sacrifice] and the broader company car fleet.”
“There’s no doubt that EVs will have to fully pay their way, it’s just about the right pace of that transition,” he says.
Anna Krajinska, UK director of campaign group Transport & Environment, points to Germany as a case study of what not to do.
Berlin ended its EV subsidy programme with no notice in December 2023, to help resolve a budget crisis. Government data released the following July showed that EV registrations had cratered, falling nearly 40 per cent year on year.
The attractiveness of EV schemes also depends on where you live, and what kind of property you live in. Travel to parts of the West Midlands, Wales and the North East, and you might find yourself running on empty due to the lack of charging stations. And if you don’t have a driveway at home, you could find that public chargers become a drain on your finances — this is an issue for FT reader Ross, who says his lack of a front drive makes charging the vehicle difficult and expensive. However, he still describes his experience as “broadly positive”.
Krajinska says these are not reasons to reduce subsidies for EVs themselves. “For now, it’s important that we keep the current schemes in place”. “We need them because we need the EV market to take off to get the economies of scale in place, so that they become affordable and competitive.”
