How does our salary sacrifice scheme work if your pay is variable?
Salary sacrifice is a discretionary, voluntary arrangement between an employer and employee, where the employee agrees to give up part of their salary in return for benefits of a similar value. Because the payment is taken from gross salary it reduces the amount of tax and National Insurance an employee needs to pay.
For example, if an employee earns £30,000 a year and they pay £500 a month for a salary sacrifice benefit, their yearly earnings would reduce to £24,000. They’d then only pay Income Tax and National Insurance on annual earnings of £24,000.
Lots of different benefits are available on salary sacrifice, including pensions, childcare, bikes, schemes and even electric cars. For most, salary sacrifice is the cheapest way to get your hands on an electric car. Our EV salary sacrifice scheme saves drivers up to 40% on the cost of a brand new car, complete with everything they need to hit the road. It includes a free home charger, installed by an expert Octopus engineer, 4,000 free miles of charge, whether they charge at home or publicly, plus all servicing, maintenance, repairs and replacement tyres. Oh, and AA breakdown cover.
Saving on tax and nabbing yourself a new electric car for a set monthly amount sounds like a brilliant deal, but are salary sacrifice schemes right for employees with a variable income, including bonuses or commission?
Can employees on variable pay still use a salary sacrifice scheme?
Yes. But, the most important thing to remember about salary sacrifice schemes is that employees can’t join if the cost would take their earnings below the National Minimum Wage.
This rule is to make sure an employee can afford any salary sacrifice payments they sign up for. As long as an employee’s pay doesn’t fall below the National Minimum Wage, they can still use salary sacrifice schemes if their income isn’t fixed. But, for the sacrifice to be viable, their basic salary must consistently be above the threshold after the sacrifice is deducted, otherwise they could fall below the National Minimum Wage in months where they don’t receive additional pay.
So how does salary sacrifice work if an employee is on variable monthly pay?
It works pretty much the same way as it would for someone earning a fixed income. Each month, an employee will pay your company an agreed amount out of your pre-tax earnings. They’ll still only be taxed on their total yearly salary less the amount of salary sacrifice you pay.
When receiving a company benefit, employees must pay Benefit in Kind (BiK) tax, aka company car tax. In the case of electric cars, this is worked out using the car’s list price (which is commonly referred to as P11D value), the BiK percentage (which is based on emissions), and your tax bracket. The good news is that, at the moment, the BiK rate for electric cars is fixed at 2% until 2025. It'll then increase by 1% each year until 2028. It's worth bearing in mind that this is set by the government so this could change based on their decisions.
Things get a little more complicated if an employee's income varies so much from month to month that they change tax brackets. Their Income Tax and National Insurance rates are decided by their annual salary. But National Insurance and Income Tax are calculated differently. Their National Insurance is calculated on a month by month basis and they pay National Insurance based on how much they’ve earned in that specific month, whereas, their Income Tax is based on total earnings to date in the current tax year. In any given month it reflects the tax band they would fall into should their income continue at that level for the remainder of the year.
Because of this, the Income Tax and National Insurance your employees pay on commission or other variable income will vary. One month they might pay at the basic rate, then at the higher rate the next month. Depending on when they receive their variable pay, during or at the end of the year, they would receive an Income Tax rebate for anything paid over what they should’ve paid based on their total income to date.
How is salary sacrifice calculated if your employees get a bonus?
Getting a bonus is great but the tax repercussions can be hard to get your head around.
When employees get a bonus, they pay Income Tax and National Insurance on it as they would on their normal salary.
Here’s an example. Imagine your employee earns £45,000 a year and gets a £20,000 bonus. In total, they’ll earn £65,000 per year which means paying Income Tax as follows:
However, if they have a sacrifice salary of £10,000 a year for an electric car, it essentially brings their annual salary down by that amount. So, they'd only pay tax on a salary of £55,000, which works out like this:
Overall, they'd save almost £4,000 in tax alone. To get the full picture of savings an electric car on salary sacrifice can generate, they also need to incorporate the National Insurance calculations.
But what if your employee gets a lump sum bonus only once during that financial year? This can make it seem as though they should be taxed at a higher rate at only that instant during the year. They’ll pay more Income Tax and National Insurance in the month they get their bonus, then over the course of the year your Income Tax will adjust to the right level, but their National Insurance should revert to normal in the following month.
Over the course of the year, regardless of when the bonus is paid, they’ll save the same amount of Income Tax on the salary sacrifice. But because National Insurance is charged monthly, when compared to the annual calculation, the National Insurance they pay may differ slightly because this isn’t corrected during the tax year.
Is salary sacrifice still worth it if your employee's income varies?
It depends on their circumstances. If your employee is confident they can afford the payments and you know they’ll still earn more than the National Minimum wage each month if they don’t receive a bonus or commission, then there shouldn’t be any problems with salary sacrifice.
If you want to get your employees on the road in a swish new electric car, saving the planet while saving cash, why not encourage them to browse our EVs to check out their options?