The introduction of the government’s zero emission vehicle (ZEV) mandate is another significant landmark in the nation’s transition to zero emission transport.

The ZEV mandate requires car and van manufacturers to sell a certain percentage of vehicles with zero tailpipe emissions. For 2024 it is 22% for cars and 10% for vans.  By 2035, this percentage will rise to 100% for both.

The ZEV mandate, as well as the cost savings, environmental regulation and tax incentives are accelerating the EV transition for businesses. And with 720,000 company cars currently on the road, these are becoming an important focal point for the transition.

Tax incentives for EVs on company car schemes

A company car scheme is where an organisation offers its employees the use of a vehicle for personal and business travel. This non-cash benefit is referred to as a benefit in kind (BIK).

An employee will then pay income tax at their marginal tax rate based on the value of the BIK. The employer will also pay national insurance contributions (NICs) based on the same BIK value.

For company cars, the BIK value is calculated based on the P11D list price of the vehicle, its CO2 tailpipe emissions and the employee’s income tax band. The tax rules for company cars are significantly weighted to incentivise and support EV adoption. 

The employee BIK rate for EVs is currently fixed at 2% until April 2025. From this date, it will then increase by 1% each year until April 2028.

As a comparison, the BIK rate for internal combustion engine (ICE) vehicles is substantially higher, reaching as high as 37% for some vehicles with high CO2 emissions.

For example, an EV with a list price of £32,000 would attract a BIK of £644 per annum, or £54 per month, payable by the employee.

Meanwhile, a petrol or diesel vehicle costing £25,900 could attract a BIK of £7,252 per annum or £604 per month – a significant increase in tax liability for the employee.  EVs also result in reduced NICs for the employer.

Potential fuel savings for businesses

Businesses can also see further financial benefits by encouraging EV uptake on their company car schemes. A prime example is the impact on fuel costs.

According to the Energy Savings Trust, around 80% of all electric car charging takes place at home, with many drivers recognising the convenience and cost-effectiveness of home charging.

Ohme, an EV charging specialist, says that a typical electric car can cover the average UK driver’s annual mileage (6,800 miles) for as little as £127.50 for the entire year, depending on the location and electricity tariff in place.

Lease payments

Limited companies can also use monthly lease payments to offset against corporation tax. In the 2023/24 tax year, for cars leased with CO2 emissions of 50g/km or less businesses can offset 100% of the lease payments against tax.

For cars with CO2 emissions of 51kg/m or more, 85% of the lease payments can be offset.

How salary sacrifice schemes can widen EV access

Companies can also extend access to EVs to employees who don’t qualify for company car schemes through a car salary sacrifice scheme. This can help businesses to tackle their Scope 3 (indirect) emissions, which includes the emissions of vehicles owned and driven by employees for commuting.

At minimal 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 don’t qualify for a company car scheme can access a brand-new EV – with no upfront payment, no early termination fees and no hidden costs. This can make EVs more affordable and accessible for employees.

As well as having access to a brand new EV, employees will also see a reduction in income tax and NICs associated with this, as the monthly payment is taken from salary pre-tax.

Salary sacrifice schemes come with the same BIK rates for EVs. Additionally, all the extra costs of running a car – including insurance, maintenance, servicing and breakdown cover – are included in the vehicle’s monthly lease costs under salary sacrifice. This means employees don’t need to budget for these additional or any unexpected costs.

For businesses, car salary sacrifice offers a cost-effective way to optimise remuneration packages, improve staff retention and boost talent attraction.

Additionally, having employees drive brand-new, fully maintained vehicles reduces occupational road risks for the workforce required to drive for business purposes.

While both company car and salary sacrifice schemes open accessible pathways to encourage EV adoption, it’s also important to carefully consider the merits of both schemes and to recognise that they’re not always interchangeable.

The two schemes are designed for different purposes and different driver cohorts, and the strategic answer for organisations could be to use both in tandem – a solution many businesses are currently opting for.

About the author

Emma Loveday, senior fleet consultant at leasing company, Volkswagen Financial Services (VWFS) Fleet