What impact does EV salary sacrifice have on my salary, pension, and benefits?

If you’re considering an EV salary sacrifice scheme, you’re probably wondering how it can affect your salary, pension, or any other benefits you may be receiving. We’ve put together some of our top asked questions in this handy guide, to help you be fully informed before starting your salary sacrifice journey.

We’ll answer:

• How does EV salary sacrifice affect my salary?
• How will my tax change with salary sacrifice?
• What happens if the tax on company cars increases?
• Will salary sacrifice affect any other payments my employer makes to me?
• What if I need a reference for a mortgage or a loan when on salary sacrifice?
• Will maternity, paternity or adoption pay be affected when on salary sacrifice?
• Will any other state benefits be affected if I’m on salary sacrifice?
• What impact does salary sacrifice have on Child Benefit?
• Will the amount of tax credits I receive change if I take part in salary sacrifice?
• Will there be an impact on my entitlement to Universal Credit with salary sacrifice?
• Will salary sacrifice impact my student loan repayments?
• Could salary sacrifice affect my State Pension?

You’ll give up a portion of your gross salary in exchange for an electric company car. Your salary sacrifice provider will let you know the exact amount and outline the potential Income Tax and National Insurance savings based on your current salary.

Since this arrangement also lowers our National Insurance Contributions, it’s possible to pass these savings on to you, reducing the amount you need to sacrifice and boosting your overall savings.

When you use salary sacrifice, you won't pay Income Tax or National Insurance on the part of your salary you give up. Check the government website for your specific rates: Income Tax and National Insurance.

However, a company car is a taxable benefit, so you'll need to pay Benefit in Kind (BiK) tax, also known as company car tax. The good news is that BiK tax rates for EVs are low, at 2% for the 2022-23 tax year, staying there until 2024-25. Starting in 2025-26, BiK will increase by 1% each year until 2028.

You'll pay BiK tax through a change to your tax code or an increase in your taxable pay.

The Government has already announced the rates of tax to be applied to company cars up to 5 April 2028, but if changes were to be announced by the Government, it would be wise to keep an eye on salary sacrifice changes.

This is specific to every individual, so it’s best to speak to your HR/Payroll team to find out more about the potential impact on any other benefits or salary-related earnings that you get.

Many lenders are familiar with the concept of salary sacrifice and run similar schemes for their own employees. Your salary sacrifice provider can provide you with a reference at your lender’s request.

Your entitlement to Statutory Maternity Pay ("SMP"), Statutory Paternity Pay ("SPP"), or Statutory Adoption Pay ("SAP") may be affected as a result of your participation in the Scheme if your average gross weekly earnings fall below the weekly earnings threshold.

For more on your entitlement to parental leave and parental pay, visit the Government website.

Your future entitlement to contribution-based benefits, such as the new style Employment and Support Allowance and Jobseeker’s Allowance, may be reduced if your gross salary falls below the Lower Earnings Limit (“LEL”).

This is why a condition of participation in the Scheme is that any salary sacrifice would not reduce your Revised Salary below this threshold.

If you or your partner receive Child Benefit and your annual income exceeds £50,000, a tax charge applies. For most employees, there will be no impact on Child Benefit.

However, if you earn over £50,000, participating in the Scheme might reduce or eliminate this tax charge because HMRC will use your Revised Salary, not your Reference Salary, for their calculations.

Joining the scheme could affect your tax credits. HMRC will consider your revised salary and the value of the BiK (Benefit in Kind) tax on your company car. Since BiK rates for zero-emission cars are low until April 2028, your income for tax credit calculations should decrease, potentially increasing your tax credit entitlement.

If your income changes by £2,500 or more, report this to HMRC as it might affect Universal Credit. For more details, visit the Government website.

Your Universal Credit is affected by your salary after deductions such as Income Tax, National Insurance Contributions and pension contributions.

If you’re entitled to Universal Credit and take part in the Scheme, your net salary should reduce, so, your entitlement to Universal Credit may increase. Find out more on the Government website.

Yes, it will. Your student loan repayments are based on your gross earnings subject to Class 1 National Insurance Contributions (NIC).

By reducing your gross salary through salary sacrifice, your repayments to the Student Loan Company should also decrease.

Your State Pension might be slightly affected by joining the Scheme. The new State Pension entitlement is based on your annual salary.

As long as your gross pay stays above the Lower Earnings Limit (£6,396 per year), your State Pension should not be impacted. For the latest rates and thresholds, check the latest HMRC guidance.