In the current financial climate, making money go further is critical for businesses and for workers. The cost-of-living crisis continues to put individuals’ finances under more strain than ever before.

At the same time, the global push for sustainability is driving to get more people into low-emission vehicles such as an electric vehicle (EV). However, although many drivers would consider switching to an EV, a recent AutoTrader survey showed that 56% of drivers felt the cost was too high in the current climate.

As a result, many employees who don’t qualify for company car schemes are choosing to stick with petrol/diesel cars. This creates a significant challenge for businesses looking to reduce their overall emissions.

Indirect (scope 3) emissions include cars owned by employees that are driven for business purposes or commuting. These account for between 65 and 95% of most companies’ carbon footprint.

Businesses need to consider how they can reduce scope 3 emissions to meet their sustainability goals, and encouraging employees outside of company car schemes to drive EVs can help. The benefits of a salary sacrifice scheme are an effective way of doing this.

Incentivising EV adoption through salary sacrifice

For businesses that want to incentivise EV adoption, salary sacrifice car schemes can be an attractive solution. At no cost to the employer, salary sacrifice schemes enable employees to ‘sacrifice’ a portion of their monthly salary (pre-tax) to fund a vehicle’s monthly lease payments.

This means employees who do not qualify for a company car can access a brand new vehicle – with no upfront payment, no early termination fees and no hidden costs.  Employees who can charge at home or at the workplace can also benefit from much cheaper running costs.

As such, salary sacrifice car schemes are increasingly viewed as a valuable addition to an employee’s remuneration package. They are a cost-effective way to enhance staff engagement and retention, while also boosting talent attraction.

Tax advantages of salary sacrifice schemes

For employees, as deductions for monthly payments are taken from an employee’s salary pre-tax, income tax and the National Insurance contributions associated with this are both lower. Additionally, all the extra costs – including insurance, maintenance, servicing and breakdown cover – are included in the vehicle’s monthly lease costs under salary sacrifice. This means employees do not need to budget for any unexpected costs to keep their car on the road.

Alongside making brand new vehicles more affordable for employees, salary sacrifice car schemes open up access to EVs through attractive tax incentives.

The benefit-in-kind (BIK) tax for EVs is currently just 2% until April 2025. After this, it will rise by 1% each year until April 2028. If we compare this to petrol/diesel vehicles, where BIK tax could be more than 30% by 2028, the savings are clear.

For employers, offering brand new vehicles through salary sacrifice schemes also saves money through a reduction in Class 1A NI contributions. In fact, when it comes to EVs, businesses can typically save around £80 to £100 per employee per month on the scheme. Additionally, having employees driving in fully maintained vehicles reduces safety risks for employees who are driving for business purposes.

Considerations

It’s important to acknowledge that salary sacrifice may not be the right route for every employee.

Firstly, deductions taken under salary sacrifice cannot push an employee’s salary below the minimum wage (pre-tax), so those on lower incomes may not be eligible to join the scheme. Salary sacrifice can also impact some benefits, as it influences ‘take-home pay’, which is often used as the basis for the eligibility criteria for statutory maternity pay and working tax credits, for example.

Overall, the scheme can offer financial and sustainability benefits to workers. However, employees need to carefully consider the potential implications before deciding on salary sacrifice as a tax-efficient method of maximising their benefits package.

Boosting sustainability

Salary sacrifice can revolutionise an organisation’s benefits package and help to attract talent when recruiting, while also improving the company’s carbon footprint and reducing costs.

The tax benefits for both employers and employees are clear, and for many, salary sacrifice offers a win-win for both staff and companies.

About the author

Jack Tanner is head of new business at Volkswagen Financial Services (VWFS) Fleet