Electric vehicle salary exchange

From 2029, changes to pension salary exchange arrangements are expected to limit the scope for National Insurance savings. While the detail is still being finalised, the proposed reforms are likely to reduce one of the most widely used salary exchange efficiencies for employers and employees alike. As a result, alternative salary exchange benefits are becoming increasingly important, and Electric Vehicle (“EV”) schemes in particular are attracting growing interest.

An EV salary exchange scheme allows an employee to give up part of their gross salary in exchange for a fully maintained lease vehicle. The deduction is taken before tax and National Insurance, meaning the employee’s taxable income is reduced which can generate significant savings compared to funding a vehicle from net pay. Importantly, the monthly cost covers considerably more than the vehicle itself. Most schemes bundle insurance, servicing, maintenance, tyres, breakdown cover and road tax into one fixed monthly amount. Sourced individually on the open market, these elements can be both costly and unpredictable, with insurance premiums in particular subject to significant year-on-year variation.

How the EV salary exchange scheme works

Salary exchange schemes address this through fleet arrangements, effectively securing services in bulk at rates an individual would be unlikely to achieve independently. The inclusion of maintenance and tyres also removes the risk of unexpected repair bills, which can otherwise run to hundreds or thousands of pounds. The result is a more stable and predictable cost of motoring, which many employees find just as valuable as the tax savings themselves.

What’s included

By way of illustration, if an employee selects an electric vehicle with a monthly lease cost of £500, that amount is deducted from gross salary. For a basic rate taxpayer, this typically generates savings of 20% income tax and 8% National Insurance, meaning the effective reduction in take-home pay may be considerably less than £500. In straightforward terms, the real cost could be closer to around £360 per month before accounting for Benefit-in-Kind (BiK) tax. When that figure already includes insurance, servicing and other running costs that would otherwise sit on top, the overall value becomes clear.

How much could be saved?

BiK tax applies because the vehicle is a taxable benefit. Electric vehicles, however, currently attract very low BiK rates. On a £40,000 electric car at a 4% BiK rate, the taxable benefit amounts to £1,600 per year. For a basic rate taxpayer, the resulting tax charge equates to £320 per year, or approximately £26 per month. Even accounting for this, many employees find the arrangement more cost-effective than a personal lease.

For higher-rate taxpayers, the savings are more pronounced. On the same £500 monthly sacrifice, a 40% taxpayer could save approximately £2,400 per year in income tax, plus around £120 in National Insurance, giving total annual savings of approximately £2,520. This may reduce the effective monthly cost to around £290 before BiK. After applying BiK at the higher rate, the additional tax is in the region of £52 per month, still representing a materially reduced cost compared to private funding.

Employer benefits

From an employer perspective, the reduction in gross salary also generates savings in employer National Insurance contributions, typically at 15%. On a £6,000 annual sacrifice, this equates to approximately £900 per employee per year. Beyond the direct financial saving, the scheme strengthens the wider employee benefits proposition, supports retention, and helps organisations advance their sustainability objectives through increased uptake of low and zero emission vehicles.

With National Insurance relief on pension salary exchange expected to be capped from 2029, EV salary exchange is likely to become an increasingly valuable component of UK employee benefits packages.

How we can help

Our employee benefits team has extensive experience supporting employers with the design, implementation and ongoing management of these schemes, ensuring they are structured effectively and aligned with both business objectives and employee needs.

To learn more or to speak with a member of our team, please contact us or visit our employee benefits page for further information.