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‘Easier than pensions’: Why electric cars are the hot company perk

Salary sacrifice schemes provide cheaper access to electric vehicles

UK employers are increasingly allowing staff to lease electric vehicles for their personal use through salary sacrifice schemes, which means they can make big tax and national insurance savings. Photograph: Caroline Brehman/EPA

Peter Campbell and Emma Jacobs
Mon May 13 2024 - 13:31

In decades past, the company car was a symbol of professional status, prized by employees as a visible marker of seniority.

It is now making a comeback in a different guise as a popular workplace perk – and has quietly become the biggest driver of electric vehicle sales across the UK.

Employers are increasingly allowing staff to lease electric vehicles for their personal use through salary sacrifice schemes, which means they can make big tax and national insurance savings. The benefit significantly reduces the cost of the car and gives companies a chance to encourage staff to think about their environmental impact.

Fiona Howarth, who runs leasing business Octopus Electric Vehicles, part of Octopus Energy, describes the scheme as a “game changer”, delivering “the most cost-effective way of making the switch” from petrol to EVs. “It is a hugely attractive benefit” for workers, offering “savings, access to the latest tech on the road, and also doing their bit for the planet and air pollution in their community”.

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She says more than 5,000 companies have signed up to offer the benefit through Octopus EV.

Electric vehicles can cost up to £10,000 (€11,600) more to buy than their petrol equivalent. Although they have much lower running costs, the upfront price still presents a barrier to drivers.

[ Electric vehicles – the long haul ]

Increasingly popular are leasing and personal contract plan (PCP) pay-monthly schemes, through which motorists finance the value a vehicle loses over three or so years rather than the total cost of the car.

Yet even with these, poor resale values and reticence from lenders mean the cost of an electric vehicle is prohibitive for many drivers.

The salary sacrifice benefit alleviates that cost and allows staff to spread payments.

The perk is having a significant effect on the car market. Traditionally the “retail” segment has been seen as an indicator of genuine consumer demand but this has been skewed by salary sacrifice.

Of the 85,000 electric vehicles sold in the UK in the first three months of this year, 80 per cent were classed as “fleet” (company cars and those buying vehicles for work), while only one in five were retail, according to the Society of Motor Manufacturers and Traders, the car industry trade body.

[ Irish electric car purchases dip again, as diesel sales rise ]

“It’s making it much more affordable for the average driver to get into an EV,” says Ms Howarth. “In a transitioning industry, it has really helped to bring the cost down.”

Some of the most popular take-up of salary sacrifice schemes has been in the public sector, particularly the NHS

Green initiatives are increasingly important to employees. More than half of Gen Z (55 per cent) and millennials (54 per cent) consider an employer’s “environmental impact and policies before accepting a job from them”, according to a survey by Deloitte last year.

But aside from remote working, cycle-to-work and EV salary sacrifice schemes, green perks are still a niche employee benefit. Some companies offer extra days for staff to travel if they take alternatives to flying to their holiday destination. Others provide opportunities to volunteer on green projects.

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Such perks can help boost employee retention, says Charles Cotton of the human resources body CIPD. “In terms of benefits, [cars are] easier to talk about and think about than pensions.”

The electric-vehicle incentive is particularly important as government ministers have wound down other EV benefits, such as the “plug-in car grant” that paid up to £5,000 when consumers bought a new car.

A salary sacrifice scheme allows an employee to deduct a monthly sum from their gross pay – so before tax and national insurance – to cover the cost of leasing the car. This reduces their taxable salary and cuts the amount of tax and insurance they pay.

[ Grant to buy used electric vehicles should be included in next budget, PwC says ]

Because of this perk, scheme users must pay a “benefit-in-kind”, or BIK, charge. Petrol or diesel cars face a BIK level of as high as 37 per cent but the UK government has set the BIK level for electric cars at just 2 per cent, in effect giving a tax cut on electric vehicles.

Octopus EV gives the example of someone with a gross salary of £35,000 a year who sacrifices about £550 per month to pay for their car. That reduces the person’s taxable income, meaning they would save about £180 per month compared with someone who pays for their car from their net pay, after tax and national insurance are deducted.

This means the UK has one of the best schemes in Europe for incentivising EVs, according to Transport & Environment, a European umbrella for non-governmental organisations.

The UK government introduced a 0 per cent BIK rate for EVs in 2020 to encourage take-up through work schemes for one year. The 2 per cent BIK rate will rise to 3 per cent in April next year, then again by a further percentage point each April until 2028.

Salary sacrifice has helped open the electric vehicle market to lower-earning customers who have traditionally found the cleaner cars out of reach. “Some of the most popular take-up of salary sacrifice schemes has been in the public sector, particularly the NHS,” says Toby Poston, director of corporate affairs at the British Vehicle Rental & Leasing Association, a trade body.

[ Setbacks for EU rollout of electric vehicles put 2050 net zero goals at risk ]

The BVRLA estimates that take-up is split evenly between people in the higher and lower-rate tax brackets and between men and women. “Salary sacrifice schemes are really helping to democratise access to electric vehicles,” adds Poston.

The popularity of salary sacrifice for EVs has been helped by a crop of third-party providers, including Octopus and Tusker, stepping in to manage the administration of leasing arrangements. David Wreford, a partner at Mercer, the human resources consultancy, says that until recently “companies [had] deprioritised company cars”, seeing them as divisive and a burden. The new external providers are attractive to employers who “don’t want the hassle of managing a fleet, they don’t like the status [associated with] company cars, and want to be green”.

Salary sacrifice can also be used on second-hand vehicles, something that is of growing interest because a wave of new electric models came to market in 2019 and 2020. These are now coming off their initial three or four-year lease deals and being sold in the used car market.

The risk to the market is a “lack of certainty on future BIK rates” beyond 2028, says Mr Poston, “or a sudden cliff-edge hike in future rates”.

The UK’s public charging infrastructure roll-out also needs to keep pace with the growth in the EV market. “Otherwise, the proportion of people who don’t have off-street parking and the ability to charge conveniently at home or at work will provide a natural ‘cap’ to demand for salary-sacrifice EVs.” – Copyright The Financial Times Limited 2024

Electric VehiclesClimate change