Salary sacrifice vs business car leasing: What's the difference?

By Tom Seymour

Last updated: Dec 12th 2023

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Drivers have multiple funding options available to them when looking at making the switch to EV

For those looking at their options when it comes to funding their next electric vehicle (EV), salary sacrifice and business car leasing can provide a route into zero-emissions driving.

This guide will look at some of the benefits and considerations to think about when it comes to making an EV's running costs work best for you.

What is a salary sacrifice scheme?

A salary sacrifice scheme allow employees at a company to proportion some of their monthly wages against the cost of a benefit, like an electric car.

This lowers an employee's monthly take-home pay, meaning they will save money and also pay less in income tax and National Insurance each month. The benefit is they get access to an affordable brand-new electric car.

The monthly charge that comes out of your pay will include the cost of the vehicle as well as company car tax or benefit-in-kind (BIK) tax.

The amount of BIK tax depends on the value of the car, and the BIK rate – which will remain at 2% until 2025 when it is due to rise by 1% every year till 2028.

It's a relatively nominal fee per month. For example, a Tesla Model Y would currently cost £38 a month in BIK tax.

A salary sacrifice scheme is good for you if...

These salary sacrifice car schemes can often unlock extra savings on new EVs, with between 30-60% off compared with a personal contract hire (PCH) agreement.

Leasing companies can buy electric cars in bulk and due to economies of scale, it means they can offer lower monthly prices for employees.

Running costs for the EV can all be bundled in as well, so your maintenance, insurance and even your home charger can all be included in the monthly price you pay.

There's a tax efficiency piece here as mentioned above too. Unlike traditional car leases, where payments come from net pay (post-tax income), salary sacrifice deducts expenses from the gross salary (pre-tax income).

It could mean that if you're skirting different tax brackets, depending on your circumstances, you could reduce your income tax and National Insurance (NI) burden even further by switching to a brand new EV. You would be incurring the cost for the EV, but that would be offset by the tax savings you could make if you're in a position to do so.

Unlike business car leasing, there are often no deposits to put down for an EV through a salary sacrifice car scheme. That means the cost to entry is more affordable compared with other methods of funding, which can either require deposits or an initial rental fee.

Have a play around with The Electric Car Scheme's salary sacrifice calculator, put in your salary details, choose an EV and see if it would work out for what you need.

A salary sacrifice scheme might not work for you if...

It should hopefully go without saying that salary sacrifice schemes will only really work if you have the salary available to sacrifice.

That means they might not be suitable for those on lower incomes. The salary sacrifice agreement cannot cause the employee to fall below the National Minimum Wage. Employers must ensure that even after participating in a salary sacrifice scheme, employees continue to receive at least the legally mandated minimum hourly wage.

You're also committing to a contract to pay for the car over the term agreed. Circumstances do change, so the driver or their employee may be liable for exit fees. This includes things like damage to the vehicle that falls outside fair wear and tear.

However, The Electric Car Scheme includes Complete Risk Protection built in with its services, which protects the employer from any shortfall in a situation where an employee has had to resign, is off long-term sick, or needs to take family-friendly leave.

If I do go for a salary sacrifice scheme, can I get a home charge point included in the agreement?

Absolutely. Smart Home Charge has partnered with the Electric Car Scheme to help facilitate their home charge point installation alongside signing up to the scheme.

When you come to choose the monthly payment plan for your new EV, there's an option to include home charger installation as part of the package. This is then bundled into the monthly price you pay and Smart Home Charge will be help install your brand new charger.

Have a look through some of the options for chargers we can supply and install here.

What is a business lease?

Companies can offer company cars to employees as a perk of the job, or in situations where vehicles are needed specifically to the job role at hand. That might be someone that does a lot of business mileage.

The company takes on the cost of the business lease from the leasing company and then the employee pays their BIK from their salary each month.

A business lease scheme is good for you if...

Company car schemes can be an attractive option. Your business mileage and charging costs are likely to be taken care of by your employer and things like maintenance costs and insurance are taken care of too.

As the company is covering the cost of the car itself, it means there's no upfront costs or ongoing monthly payments from you as an employee, other than the BIK charge.

A business lease may also be better suited if you are paid mainly in dividends rather than salary; or are the sole owner operator of the company.

A business lease scheme might not work for you if...

Businesses have specific requirements and seniority bandings where not every employee would get on a company car scheme.

For example, an employee may need to do a minimum number of miles to qualify for the scheme.

Many organisations are reviewing their company car schemes to narrow down eligibility even further or replacing them entirely with salary sacrifice car schemes instead.

Some company car schemes can also be limited on the choice of vehicles available. Fleet managers and companies may only offer certain vehicles and models, so you might not be able to get the exact EV you want.

Alternatively, a salary sacrifice scheme still opens up the option for more employees to make a switch to an EV in a tax efficient way.

In conclusion

A salary sacrifice car scheme and a business lease are both viable options that open up the potential for switching to an electric car.

It's likely you'll already be aware whether you can get onto a company car scheme or not, or if you're a company owner, whether you can lease a vehicle through the business itself.

If you're an employee, your company might not already have a salary sacrifice car scheme in place so it's worth seeing if there are more people you work with that would be interested in accessing an EV through work.

Salary sacrifice car schemes are simple enough to set up, and companies like The Electric Car Scheme can help HR teams and businesses introduce such schemes as an added employee benefit.