How much could salary sacrifice save you on an electric car?

Although they are growing in popularity, many potential owners still cannot afford electric cars

Is driving an EV the most cost-effective option if you sacrifice your salary?

Getting behind the wheel of an electric vehicle (EV) through salary sacrifice is becoming more and more common. It provides substantial tax benefits and is a financially sensible way for many people to purchase EVs.

However, how much money could you really save?

Driving an EV while sacrificing your salary is equivalent to leasing the vehicle.

One way to purchase (or rent) a car is through leasing. Others include hire purchase (HP) and personal contract purchase (PCP); these are covered in more detail in our car finance explainer, and we'll compare them to leasing later in this post.

Salary sacrifice, however, is something that is definitely worth taking into consideration if you have ever wanted to drive a Tesla or other electric vehicle and are unsure of the most economical way to do so.

You will need to take into account things like the tax you pay for in-kind benefits, and your employer must provide a plan to do so. A comprehensive explainer on these factors was recently published by the FT.

The key question we are examining here is the cost-effectiveness of sacrificing a salary for an EV.

It's quite difficult to compare these various auto financing options. Accuracy is practically impossible because of the variety of factors involved.

A basic comparison between salary sacrifice and other car financing options, such as buying a car outright with cash, has been attempted using some indicative figures.

Is it more cost-effective to forgo a salary than to lease an EV?

Yes is the short answer.

"The most economical way to drive an EV is to sacrifice your salary," Octopus Electric Vehicles chief commercial officer Oliver Boots tells BFIA.

These savings can be attributed to two factors. The first is how salary sacrifice is tax-efficient. There are considerable tax benefits (20 percent for basic rate taxpayers and 40 percent for higher rate taxpayers) because monthly payments are deducted from your gross salary (before taxes).

The majority of EV salary sacrifice programs, like Octopus, will also cover a number of additional expenses that most drivers must pay for themselves, like insurance, maintenance, and services, as Boots notes. That is EV salary sacrifice schemes' second major source of savings.

Octopus Electric Vehicles provided BFIA with the following figures as an example. These are based on the assumption that a 50-year-old driver will have a 48-month term with an annual mileage cap of 5,000 (the majority of auto financing plans set an annual mileage cap). The closest equivalent, a Curpa Born e-Boost V1 59kWh leased through salary sacrifice, is contrasted with the same model leased through personal contract hire (PCH).

Calculations from Octopus Electric Vehicles were used, with BFIA modifications.

Once more, relying on these figures in any meaningful way is not advised because they are indicative and extremely rough estimates. With those disclaimers in mind, however, it implies that the ability to sell your car after three or four years might not be as valuable as you might believe, considering the effect of depreciation, a cost that is covered by the business leasing the vehicle under a salary sacrifice plan.

To put it another way, especially for higher-rate taxpayers, choosing to lease an EV through salary sacrifice may result in cost savings even after accounting for the resale value of an equivalent car purchased outright.

However, the more trustworthy conclusion is that, after depreciation is taken into account, the lifetime costs of leasing an EV through salary sacrifice are comparable to those of owning one and then selling it.

"It probably makes more sense to lease rather than buy if you're not worried about ownership and would prefer to drive a new car every few years without having to sell," Hempsted says.