Salary sacrifice is an increasingly popular method of getting behind the wheel of electric vehicles (EVs). It offers significant tax advantages, and makes a financially sound means of accessing EVs for many people.
But how much money could it actually save you?
When driving an EV through salary sacrifice, you are leasing the car.
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Leasing is just one means of buying (or renting) a car. There are others, such as personal contract purchase (PCP) or hire purchase (HP): our car finance explainer has further details, and we’ll compare these to leasing later in this article.
But if you’ve fancied driving a Tesla or other electric car and are wondering what the most cost-effective means of doing so is, then salary sacrifice could be worth considering.
Your employer will need to offer a scheme to do so, and you’ll want to consider factors like the tax you pay for benefits in kind too.
The big question we’re exploring here is how cost-effective salary sacrifice for an EV is.
Comparing these different forms of car finance is very complex. It’s effectively impossible to do accurately due to the range of different factors involved.
We’ve used some indicative figures here to attempt a basic comparison between salary sacrifice and other forms of car finance, including purchasing outright in cash.
Can salary sacrifice save money compared to leasing an EV?
The short answer is yes.
“Salary sacrifice is the most cost-efficient way to drive an EV,” Oliver Boots, chief commercial officer at Octopus Electric Vehicles, tells MoneyWeek.
There are two reasons for these savings. First is the tax-efficiency of salary sacrifice. Because monthly payments come out of your gross salary (before tax) there are significant tax advantages – 20% for basic rate taxpayers and 40% for higher rate.
As Boots points out, most EV salary sacrifice schemes (including Octopus’) will also include various other costs that most drivers have to cover themselves, such as insurance, services and maintenance. That’s the second main source of savings on EV salary sacrifice schemes.
To illustrate, Octopus Electric Vehicles shared the figures below with MoneyWeek. These assume a 48-month term for a 50 year old driver, with a limit of 5,000 miles per annum (most car financing schemes specify an upper limit of mileage every year). They compare a Curpa Born e-Boost V1 59kWh leased through salary sacrifice versus the same model leased through personal contract hire (PCH), the closest equivalent.
| Header Cell - Column 0 | Monthly car cost | Fuel | Insurance Insurance group for EV = 26E | Service & Maintenance | Upfront payment | Total monthly cost, including upfront payment for PCH EV | Total term cost, INCLUDING initial upfront payment for PCH EV |
|---|---|---|---|---|---|---|---|
Curpa Born | Row 0 - Cell 1 | Row 0 - Cell 2 | Row 0 - Cell 3 | Row 0 - Cell 4 | Row 0 - Cell 5 | Row 0 - Cell 6 | Row 0 - Cell 7 |
20% tax payer cost | £403 | £7 | £0.00 | £0.00 | £0.00 | £409 | £19,640 |
40% tax payer cost | £346 | £7 | £0.00 | £0.00 | £0.00 | £353 | £16,937 |
Cupra Born | Row 3 - Cell 1 | Row 3 - Cell 2 | Row 3 - Cell 3 | Row 3 - Cell 4 | Row 3 - Cell 5 | Row 3 - Cell 6 | Row 3 - Cell 7 |
PCH cost | £336 | £8 | £52 | £39 | £336 | £442 | £21,238 |
Savings (EV on salary sacrifice vs. PCH) | Monthly car cost | Fuel | Insurance | Service & Maintenance | Upfront payment | Total monthly cost, including upfront payment for PCH EV | Total term cost, INCLUDING initial upfront payment for PCH EV |
|---|---|---|---|---|---|---|---|
20% tax payer - £ | -£66 | £1 | £52 | £39 | £336 | £33 | £1,599 |
40% tax payer - £ | -£10 | £1 | £52 | £39 | £336 | £90 | £4,302 |
Source: Octopus Electric Vehicles
On this car – which has an RRP of around £35,000 – a 20% taxpayer would save £1,600 over the course of a four-year lease, with that figure rising to £4,300 for a 40% taxpayer.
Is leasing the most cost-effective way to drive an EV?
This question is much less straightforward to answer.
The big difference between leasing (salary sacrifice or PCH) compared to other forms of car finance are that, once the term is up, you do not own the vehicle and it is returned to the provider of the salary sacrifice scheme.
There are some options of what can happen from there, explains Boots. “You can either extend the car and keep it for a bit longer, and that could be an informal extension for a number of months, or it could be a formal extension for a number of years.
“They can just give the car back and we’ll come and pick it up and take it away.”
A third option that isn’t typically available on conventional leasing arrangements but can sometimes be workable through salary sacrifice schemes is to purchase the car outright – but this is never guaranteed.
“What we definitely don’t do, and no salary sacrifice scheme can do, is guarantee that you can buy the car, because then it becomes a purchase agreement, and it’s not that, it’s a leasing arrangement.”
In the event that a purchase can go ahead, the price will be calculated by the provider of the salary sacrifice scheme, based on its estimates of the car’s ‘residual value’ – IE, what the car is now worth after you’ve driven it around for four years (or whatever the length of the original lease was).
If you want to guarantee the option to buy the car at the end of your lease period, with the price locked in from the outset, then a personal contract purchase (PCP) is a more appropriate option.
Making a direct comparison between these methods is incredibly complicated, largely because the figures involved will depend heavily on each individual customer’s personal circumstances (such as their credit score, their age, and potentially factors like their driving history).
As such, the better comparison between different types of car finance is in terms of the nature of the agreement itself.
Leasing a car through salary sacrifice or PCH “can be a good option if you’re wary of a long-term commitment or like to drive a new model every few years,” Alicia Hempsted, car insurance expert at MoneySuperMarket, tells MoneyWeek.
“Lease agreements can, for some drivers, be more convenient than buying, as they typically include warranty coverage and exclude MOT tests for the first three years. This means there tends to be less upfront costs than buying a car and makes budgeting more predictable,” Hempsted adds.
She cautions though that ending a lease early can incur additional fees.
Should you buy an EV outright?
One of the biggest criticisms of leasing a car – even through salary sacrifice – is that you’ll spend tens of thousands of pounds, and at the end of the lease have nothing to show for it.
Yes, cars depreciate in value. But a glance at some second-hand models available online suggest that a three year old Cupra Born that has driven around 7,000 miles per year (more than the maximum allowance on Octopus’s example) sells for over £23,000.
Wouldn’t it be worth owning the car outright – buying it in cash (or with a personal loan) if you were able to, then selling it at the end of the lease – rather than jumping into another contract?
Again, a direct comparison is impossible (because the Cupra Born launched in 2022, there are no four-year-old models available to compare to the full term). And all the caveats in the previous section still apply: this is a representative example, and because it’s comparing very different types of contract, it’s not a case of apples versus apples.
However, if we change the term to 36 months to make the comparison as close as possible, this is how the numbers compare between buying a the Cupra outright with cash (then selling it for £23,000) versus leasing it through salary sacrifice:
| Header Cell - Column 0 | Monthly car cost | Fuel | Insurance Insurance group for EV = 26E | Service & Maintenance | Upfront payment | Total monthly cost, including upfront payment for PCH EV | Total term cost, INCLUDING initial upfront payment for PCH EV | Total term cost, INCLUDING resale value |
|---|---|---|---|---|---|---|---|---|
Curpa Born | Row 0 - Cell 1 | Row 0 - Cell 2 | Row 0 - Cell 3 | Row 0 - Cell 4 | Row 0 - Cell 5 | Row 0 - Cell 6 | Row 0 - Cell 7 | Row 0 - Cell 8 |
20% tax payer cost | £403 | £7 | £0.00 | £0.00 | £0.00 | £409 | £14,730 | £14,730 |
40% tax payer cost | £346 | £7 | £0.00 | £0.00 | £0.00 | £353 | £12,703 | £12,703 |
Cupra Born | Row 3 - Cell 1 | Row 3 - Cell 2 | Row 3 - Cell 3 | Row 3 - Cell 4 | Row 3 - Cell 5 | Row 3 - Cell 6 | Row 3 - Cell 7 | Row 3 - Cell 8 |
Cash purchase cost | £0 | £8 | £52 | £39 | £35,000 | £1,071 | £38,566 | £15,566 |
Based on calculations from Octopus Electric Vehicles, with alterations made by MoneyWeek.
Or if we maintain a four year lease and assume that the car loses £4,000 in value every year, the sums look like this:
| Header Cell - Column 0 | Monthly car cost | Fuel | Insurance Insurance group for EV = 26E | Service & Maintenance | Upfront payment | Total monthly cost, including upfront payment for PCH EV | Total term cost, INCLUDING initial upfront payment for PCH EV | Total term cost, INCLUDING resale value |
|---|---|---|---|---|---|---|---|---|
Curpa Born | Row 0 - Cell 1 | Row 0 - Cell 2 | Row 0 - Cell 3 | Row 0 - Cell 4 | Row 0 - Cell 5 | Row 0 - Cell 6 | Row 0 - Cell 7 | Row 0 - Cell 8 |
20% tax payer cost | £403 | £7 | £0.00 | £0.00 | £0.00 | £409 | £19,640 | £19,640 |
40% tax payer cost | £346 | £7 | £0.00 | £0.00 | £0.00 | £353 | £16,937 | £16,937 |
Cupra Born | Row 3 - Cell 1 | Row 3 - Cell 2 | Row 3 - Cell 3 | Row 3 - Cell 4 | Row 3 - Cell 5 | Row 3 - Cell 6 | Row 3 - Cell 7 | Row 3 - Cell 8 |
Cash purchase cost | £0 | £8 | £52 | £39 | £35,000 | £828 | £39,755 | £20,755 |
Based on calculations from Octopus Electric Vehicles, with alterations made by MoneyWeek.
Again, these are indicative figures and incredibly rough estimates – they shouldn’t be relied upon in any meaningful sense. With those caveats in mind though, it suggests that the ability to re-sell your car after three or four years may not count for as much as you’d think, given the impact of depreciation – a cost which is borne by the company that leases the car in a salary sacrifice scheme.
In other words, leasing an EV through salary sacrifice could save you money even when factoring in the resale value of an equivalent car bought outright, especially for higher-rate taxpayers.
The more reliable takeaway, though, is that the lifetime costs of leasing an EV through salary sacrifice are similar to those of owning one then selling it, once the impact of depreciation is factored in.
“If you’re not worried about ownership and would rather drive a new car every few years without having to sell, it probably makes more sense to lease rather than buy,” says Hempsted.
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