EV salary sacrifice scheme can mitigate effects of 40% tax trap

A salary sacrifice scheme that provides electric cars can prove a hugely valuable way of reducing employees’ exposure to the ever-widening 40% tax trap, with growing numbers of people set to be caught out in the next four or five years by the government‘s decision to freeze tax thresholds.

So says Tamworth-based fleet management and salary sacrifice specialist, Fleet Evolution, after the latest figures from the Institute for Fiscal Studies show that almost 8 million people, one in five of all tax paying adults, will fall into the 40% tax band of £52,701 – £150,000 by the tax year 2027/8.

These figures include one in four teachers and one in eight nurses and is quadruple the number of 40% taxpayers in the early to mid-1990s.

Chancellor Jeremy Hunt announced in the last Budget Statement that tax thresholds would be frozen for the next six years, despite soaring inflation, which will push millions more people into the 40% tax paying bracket, as wages continue to increase. Average private sector earnings, excluding bonuses, are 7% higher than a year ago.

Latest analysis from Fleet Evolution shows that an electric car leased through a salary sacrifice scheme can not only save income tax but it can, for employees with children, also help protect valuable childcare benefits.

Founder and managing director, Andrew Leech (pictured), said: “At a time when employees face rising costs in many areas, including food, energy and motoring, this latest stealth tax from the Government is set to push more and more people into the 40% tax bracket through no fault of their own.

“These are largely middle earners – what’s commonly referred to as ‘Middle Britain’ – who are being squeezed from all sides and are not high earners. But, they are being caught out by the Government’s freeze in tax thresholds, which will also have a negative impact on families with small children.”

Leech said that an employee with three children and earning £48,000 a year, would be earning an estimated £55,000 in 2027/28, based on average 5% annual pay increases.

“This will take them into the 40% tax band and means they lose 50% of their childcare benefit, roughly on average £120 a month, as this is index linked. At a time of rising inflation, this is something they can ill-afford.”

Leech said that by opting for an electric car via salary sacrifice, employees would see multiple financial and welfare benefits.

“A typical salary sacrifice electric car, such as an MG4 Long Range, would reduce their gross salary by £6,000 per annum, bringing them back down below the £50,000 mark.

“But for individuals affected by the freezing of the personal allowance, the benefits are even greater, as they would save around £50 a month from the additional savings, plus retain full child benefit if this relates to them, as much as £120 a month in this example.

“There are also other benefits to investments, savings and other taxable income, while electric cars currently benefit from the current BIK tax regime, which makes them highly attractive and very affordable for many employees, provided they are above the minimum living wage.

“Electric cars are currently an extremely valuable benefit to employees and, according to our latest survey, are rated highly for their convenience, ease of use, absence of upfront payments and value for money. Many employees would not consider moving to an employer who did not offer an electric car salary sacrifice scheme.”