Does EV salary sacrifice affect pension contributions?
Salary sacrifice schemes are an amazing employee benefit that allows you to reduce the amount of tax you pay by giving up a portion of your salary in exchange for a non-cash benefit. Our EV salary sacrifice scheme is a good example of the type of non-cash benefit you can get from your employer. You give up a portion of your salary each month, and in exchange, you get to take home an electric car and save money in the process. Winner!
While salary sacrifice schemes can be really beneficial and help you save money, it's important to understand the potential impact they can have on your pension, especially if you’re part of a defined benefit pension scheme like the Teachers Pension Scheme (TPS) or Local Government Pension Scheme (LGPS).
How do salary sacrifice schemes work?
Through a salary sacrifice scheme, you might give up £350 of your monthly salary in exchange for a brand-new ORA Funky Cat and make significant savings compared to taking out a personal lease on the same car. If you’re a 40% taxpayer, you could save almost £2,000 a year on the ORA Funky Car compared with a VW Golf through salary sacrifice because you make your car payments from your gross salary - check out our EV salary sacrifice calculator to compare more cars. Paying for the car from your gross salary means taxable income is reduced, so you pay lower Income Tax and National Insurance Contributions (NIC).
Paying less tax and NIC on your monthly salary is great, but it’s worth knowing that depending on what type of pension scheme you take part in, your pension contributions can sometimes be reduced too. This isn’t the case for most people, but if you’re part of a defined benefit pension scheme, salary sacrifice car payments can also have an impact on your pension.
What are the different types of pension schemes?
There are two types of workplace pension schemes – defined benefit and defined contribution schemes.
Defined contribution pension scheme
Nowadays, this is the most common type of pension scheme, and most people have this type of pension. This scheme lets employees pay a set amount into their pension every month, subject to a minimum threshold, which their employer will usually match. The pension payable on retirement will then be based on the value of the pension fund.
Defined benefit pension scheme
This is a type of pension plan that guarantees you a certain amount of money each year once you’ve retired. It’s different from defined contribution pension schemes, where you save money over time into your pension, because the pension paid on retirement is based on what you earned when you were working. These types of pensions are now mostly offered by public sector employers, but some private companies still offer them.
Can salary sacrifice schemes affect your pension?
The impact of salary sacrifice schemes on your pension will depend on the specific salary sacrifice scheme you’re taking part in and the type of pension you have. In general, if you have a defined contribution pension scheme, your pension is unlikely to be affected by salary sacrifice because your pension contribution is calculated before your salary sacrifice has been applied. This means there is no reduction in your contribution and no impact on the benefits payable once you’ve retired.
But if you participate in a defined benefit pension scheme, like the TPS or LGPS, the impact on your pension can be bigger if the salary sacrifice is not approved by the government. This is because your pension contributions (and ultimately your pension) are based on your salary after you’ve made certain deductions, like salary sacrifice.
So, as well as saving Income Tax and NIC you can benefit from making reduced pension contributions while you’re participating in a salary sacrifice scheme. But if you’re a member of the TPS, your pension is calculated on your average career earnings, and because salary sacrifice for cars is not one of the approved forms of sacrifice, any reduction in pay arising from the salary sacrifice will reduce your average earnings across your career and therefore your pension in retirement.
How does salary sacrifice impact employees in a defined benefit pension scheme?
Let's say you're a teacher earning £40,000 per year with an electric car on our salary sacrifice scheme. To work out how much you’d save via salary sacrifice, we would need to multiply the amount you sacrifice by the percentage contribution you make to your pension each month and the Income Tax and NIC rates you pay.
If you were paying £500 gross a month towards an EV through salary sacrifice across a 3 year lease and you’re part of the TPS, you would save 20% Income Tax, 12% NIC, and 8.6% pension contribution every month on this amount. There would be a small amount of Benefit in Kind tax you’ll need to pay at 2% of the car's P11D value, so in this scenario you’d end up with a net sacrifice amount of £308 for your car (excluding any additional savings available if you also have student loans).
However, as you’re a member of the TPS, taking out the salary sacrifice would reduce the pension you receive when you retire at the current TPS retirement age of 60. In the example below, we assume you work as a teacher for 38 years between the ages of 22 and 60, with a career average salary of £40,000 per annum.
A TPS pension is calculated by dividing your average salary over your working career by 57 and then multiplying this by the number of years you worked, in this example, 38, to produce a final figure. This is the amount you’ll receive for each year you draw your pension.
Without taking a salary sacrifice car, assuming average career earnings of £40,000, your yearly pension would be £26,667. But, if you sacrificed £6,000 per year for 3 years in return for a salary sacrifice EV, your yearly pension payable from age 60 would be £26,351. Taking out the salary sacrifice would reduce your pension by roughly £316 per year.
It’s also important to note that your salary sacrifice would save you around £6,925 over the three years, and even though your pension would be reduced slightly when you draw it at age 60, we think it’s a good trade off!
Not only will you be using that money to get yourself a new car, but you’ll also be able to make amazing savings on fuel costs. More than a quarter of our customers who charge their EV at home save a whopping £150 a month on fuel costs after switching to an EV. Across a 3 year lease, that’s an additional potential saving of £5,400!
How can salary sacrifice affect State Pensions?
Your entitlement to State Pension is determined by reference to your annual pay for Class 1 NIC purposes throughout your working life. You’ll be entitled to a State Pension when you reach retirement age (currently 67), but there are other factors at play too, like your age and whether or not you have any gaps in your National Insurance record, which might arise during periods when you’re not working or if your pay is too low.
Under most circumstances, your State Pension shouldn’t be affected by taking part in a salary sacrifice scheme because you'll still accrue qualifying years for the State Pension provided your earnings exceed the Lower Earnings Limit (“LEL”) of £6,396. It’s highly unlikely that a salary sacrifice would affect your entitlement to the State Pension because you’d need to work very few hours per week to be able to join our scheme and take your earnings below the LEL while still complying with the National Minimum Wage threshold.
Our electric vehicle salary sacrifice scheme is an amazing benefit that can save you money and help the environment. It’s likely that no matter what pension scheme you participate in, the impact of taking a car through salary sacrifice will be minimal, and the savings you can make in the long run will far outweigh the impact of pension benefit reductions.
It’s important to understand what this means for you. While we’re here to help you every step of the way, if you have any concerns regarding the impact salary sacrifice might have on your pension contributions or benefits, you should consult an independent financial advisor.