Electric vehicle (EV) salary sacrifice schemes have become one of the most popular employee benefits in the UK, offering significant tax savings for both employees and employers. In this comprehensive guide, we'll explore everything you need to know about EV salary sacrifice in 2025.
What is EV Salary Sacrifice?
Salary sacrifice is an arrangement where an employee agrees to reduce their gross salary in exchange for a non-cash benefit - in this case, an electric company car. The beauty of this arrangement is that both the employee and employer save on National Insurance contributions, while the employee also benefits from reduced income tax on the sacrificed amount.
The Tax Benefits
Electric vehicles enjoy the lowest Benefit in Kind (BIK) tax rates currently available for company cars. As of the 2024/25 tax year, fully electric vehicles are taxed at just 2% of their P11D value (the list price including VAT and accessories).
For a higher-rate taxpayer driving an electric car worth £40,000, the annual BIK tax would be just £320 (£40,000 × 2% × 40%). Compare this to a petrol equivalent with 120g/km CO2 emissions, which could attract a BIK rate of 30% or more, resulting in annual tax of £4,800 or higher.
How Much Can You Save?
The savings can be substantial. Let's look at a typical example:
- Vehicle: Tesla Model 3 (P11D value: £45,000) - Employee: Higher rate taxpayer (40%)
- Annual BiK Tax: £360 (£45,000 × 2% × 40%)
- Monthly Cost: £30
Through salary sacrifice, the monthly lease cost might be £500, but this comes out of your gross salary before tax and NI. The actual net cost to you could be as low as £300-£350 per month, depending on your tax bracket.
Who Can Benefit?
EV salary sacrifice schemes are particularly attractive for:
- Higher and additional rate taxpayers
- Employees who need a company car
- Those looking to reduce their carbon footprint
- Employees whose current salary is above the threshold for certain benefits - Companies looking to offer attractive employee benefits
Important Considerations
While EV salary sacrifice offers significant benefits, there are some factors to consider:
- Salary Reduction Impact: Your gross salary will be lower, which could affect mortgage applications or pension contributions
- Commitment Period: Typical schemes last 2-4 years
- End of Contract: Understand what happens when the scheme ends
- National Minimum Wage: Your reduced salary must stay above the legal minimum
Getting Started
To participate in an EV salary sacrifice scheme:
- Check if your employer offers the scheme
- Choose your vehicle from the available options3. Calculate your net savings using our calculator4. Review and sign the salary sacrifice agreement
- Start enjoying your new electric vehicle
The Future of EV Salary Sacrifice
The government has committed to maintaining favorable BIK rates for electric vehicles through 2028, with rates gradually increasing to 5% by 2027/28. This makes now an excellent time to take advantage of these schemes before the rates increase.
Conclusion
EV salary sacrifice schemes offer a win-win situation: employees save money on tax while driving the latest electric vehicles, employers reduce their NI contributions, and we all benefit from reduced emissions. Use our calculator to see exactly how much you could save.
