The electric car salary sacrifice tax break that can save you 40%

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The price gap has narrowed with petrol and diesel models, but electric cars such as the new Peugeot e-208 are still comparatively expensive


Fifteen years seems like a long time but you can almost guarantee that 2035 will arrive sooner than we think – and that date took on extra significance for our electric future this week.

From 2035 onwards, the sale of new petrol, diesel and hybrid cars will be banned and if we stick to that you can expect the majority of new cars sold to be electric about five years earlier.

That’s a long way from the current 2.7 per cent of sales. However, as someone who writes about both money and motoring, the wealth of questions I get asked about electric cars indicates to me that the demand for a sizeable uptick exists.

What holds most people back though is the cost. The choice and supply of second hand electric cars is thin and although the price gap with petrol and diesel models has narrowed, brand new electric vehicles are comparatively expensive.

The price gap has narrowed with petrol and diesel models, but electric cars such as the new Peugeot e-208 are still comparatively expensive

Add to this that not everyone likes to buy new cars – if you’re like me you prefer to let someone else suffer the first few years of depreciation – and you can see why the rise of electric cars on the road lags the interest in them.

There is potentially, however, something of a financial game-changer for driving an electric car, which might save 32 per cent to 42 per cent of the monthly cost of getting behind the wheel.

The key to this is salary sacrifice, the same system many employers use for pension contributions, cycle to work schemes, and childcare vouchers, allowing workers to effectively pay tax-free.

It’s a fairly simple concept, you opt to forgo a certain chunk of your salary and your employer pays that into your pension, bike repayment, childcare voucher scheme instead.

This saves you both national insurance and income tax, which for a basic rate taxpayer is 32 per cent and a higher rate taxpayer 42 per cent.

A few years ago, a cottage industry sprung up allowing people to salary sacrifice all kinds of stuff for personal use and the government duly cracked down on it.

But a special exemption was put in place for ultra-low emission vehicles to encourage motorists to swap their petrol and diesel cars for electric ones.

This meant that the government theoretically had no problem with your employer allowing you to pay for an electric car from untaxed income through salary sacrifice.

The catch – and most likely the main reason this hasn’t caught on – is that this is judged to be what’s known as a benefit-in-kind and the government has been giving a tax break with one hand and taking it away with the other.

At the moment, the benefit-in-kind, or BiK rate, on a pure electric car is 16 per cent and the way that the maths works means much of the tax benefit of the salary sacrifice is eaten up by the charge.

This changes in April though, when electric cars will have a zero BiK rate and salary sacrifice benefits can be felt in full. 

If you are a higher rate taxpayer then salary sacrifice could take the monthly cost of a contract hire deal on a Tesla Model 3 down from about £530 to an effective £307

If you are a higher rate taxpayer then salary sacrifice could take the monthly cost of a contract hire deal on a Tesla Model 3 down from about £530 to an effective £307

The monthly cost for a Tesla Model 3 Standard Range Plus with no deposit down over 48 months could be roughly £530, but under salary sacrifice for a higher rate taxpayer it effectively costs 42 per cent less, or £307 of the wages they would normally see.

A cheaper electric runaround, on a shorter two-year contract hire, such as a Renault Zoe, might cost £270 normally, but through salary sacrifice a basic rate taxpayer would save 32 per cent, meaning it only effectively costs them £184 a month.

If you would usually spend £100 to £130 a month on petrol or diesel and opt to get a home charger, the fuel savings can make electric motoring even cheaper.

Even for someone as averse to brand new cars and their depreciation as me, this starts to look quite tempting.

What makes it particularly attractive is that you can also bundle insurance, road tax and servicing plans into the salary sacrifice.

Jaguar's I-Pace has won plaudits as one of the best electric cars around but the on the road price is more than £60,000

Jaguar’s I-Pace has won plaudits as one of the best electric cars around but the on the road price is more than £60,000

A number of companies offer to help employers set up such salary sacrifice schemes, doing much of the work for them.

One of them is Octopus EV – the electric car sister brand of challenger energy supplier Octopus. Obviously, boss Fiona Howarth is a passionate electric car champion and says that while until now the benefit-in-kind charge has been a hindrance, ‘as soon as it drops to 0 per cent it’s a no-brainer’.

She says Octopus EV is seeing lots of interest from businesses about setting up salary sacrifice schemes and often this stems from employees championing electric cars, with executives regularly among the chief advocates.

The benefit for a business – beyond directors getting cheaper I-Paces and Teslas – is that an electric car salary sacrifice scheme can offer staff a good deal, help those who want to go green, and improve employee recruitment and retention, says Fiona.

A potential fly in the ointment is that even as the internal combustion engine car ban was pulled forward to 2035, rumours began to swirl that the £3,500 grant for buying pure electric cars may not be renewed after March.

Nonetheless, even without that bung, salary sacrificing a new electric car makes it substantially more affordable and choice is growing, with the Golf-sized VW ID.3, Peugeot e-208 and Mini Electric all due to arrive soon.

We are also in something of a sweet spot, as if you could buy a car now you will get the £3,500 grant and although will have to pay two months of the 16 per cent BiK but come April that will drop for you to 0 per cent. 

Maybe it’s time to start lobbying your work.

A wave of new electric cars are due to arrive in showrooms including VW's ID.3 - a Golf-sized car that is eagerly awaited

A wave of new electric cars are due to arrive in showrooms including VW’s ID.3 – a Golf-sized car that is eagerly awaited

 

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