Salary exchange, also known as salary sacrifice, is a type of employee benefit increasingly being adopted by businesses looking to engage and reward employees, while also positioning themselves as progressive businesses and employers that prioritise employee welfare and sustainability. Although a salary exchange scheme can be used for pensions and healthcare benefits, a very popular type is leasing an electric vehicle (EV).
What is a salary exchange?
With a salary exchange scheme, an employee agrees to sacrifice a portion of their salary in exchange for a non-cash benefit. In this case, a salary exchange EV scheme would see the salary portion sacrificed cover the monthly lease payment towards a brand-new EV. This money is taken from the employee’s pre-tax gross salary, meaning they pay less income tax and national insurance.
The lease agreement allows the employee to have exclusive use of an EV for the duration of the lease, which is usually from six months up to four years. At the end of the lease, the employee returns the EV to the lease company and is free to start another lease on another EV.
The key benefits of an EV salary exchange
Salary exchange EV schemes offer various benefits, and these can apply to both the employee and the employer. Let’s look at the employee benefits first:
- Cost savings – Paying reduced income tax and national insurance offers benefits by reducing the employee’s taxable salary. Car leasing is also more cost-effective than buying a car on personal finance, as the employee is only covering the cost of depreciation to the car leasing company, and isn’t paying for ownership.
- Tax efficient – The Benefit-in-Kind tax on company vehicles is much reduced for EVs, compared to petrol and diesel vehicles.
- One monthly cost – Most of the employee’s motoring costs are covered in the all-inclusive monthly payment taken as the salary sacrifice. This typically covers the lease cost, service, maintenance, road tax and insurance. They only need to charge the battery, which is also cheaper per mile than petrol and diesel.
- Flexible – The employee can choose the lease length to suit their needs and circumstances.
- Low risk – There is no upfront cost to the employee, and early termination options may be available if they leave the business.
- Brand-new vehicle – When driving a brand-new vehicle, the employee benefits from the latest technology in performance, comfort, safety, efficiency and infotainment.
- Environmental – The employee is reducing their carbon footprint by driving a zero-emission vehicle.
There are also key advantages for the employer:
- National Insurance payments – The income tax and national insurance benefits that apply to the employee also help the employer, as they will pay reduced national insurance contributions for each individual signed up to the scheme.
- Employee engagement – As the scheme can be offered to all eligible employees, this helps to promote inclusivity. Company cars have traditionally been exclusive to senior roles, whereas salary exchange can be offered regardless of position. This helps employees feel valued and can contribute to improved engagement, morale and retention.
- Fleet management & leasing partnerships – The right EV salary exchange scheme provides competitive lease deals from multiple manufacturers, whilst also giving better visibility over the organisation’s grey fleet.
- Environmental impact – Reducing emissions from grey fleet vehicles helps support wider environmental targets.
- Scheme registration – Registration should be quick and straightforward, with an online management portal and document templates to streamline administration and reduce workload for HR teams.
- Compliance – A centralised portal provides visibility of enrolment, compliance information and employee contract updates.
- Reputation – Offering a salary exchange EV scheme improves reputation as a progressive and sustainable employer. It can help attract and retain employees and strengthen positioning as a forward-thinking organisation.
Considerations when introducing a salary exchange EV scheme
A key consideration is that employees cannot reduce their salary below the relevant National Minimum Wage through the scheme.
Communication is also important. Employers can use provided resources to explain how salary exchange works and its benefits. Clear messaging encourages take-up and helps maximise benefits for both employees and the business.
