Chancellor Rachel Reeves is reportedly considering scrapping tax breaks for salary sacrifice schemes used by tens of thousands of drivers to rent electric cars.
The move is likely to deal a major blow to the UK’s march towards widespread electric vehicle adoption. The Treasury is reviewing whether to scrap or amend the scheme, which allows employees to lease electric vehicles by paying monthly installments before income tax and National Insurance are deducted, providing significant savings.
While these schemes have been credited with boosting electric car sales during a slowdown in demand for new cars, critics argue that they disproportionately benefit wealthier individuals. The Decision Foundation, a research organization, has called for the removal of tax breaks for salary sacrifice and company cars, noting that the benefits accrue largely to high-income earners who can afford new cars.
Chancellor Reeves is expected to address these concerns in her first Budget on 30 October. In the run-up to the Budget, Reeves hinted that those on higher incomes would face additional tax burdens, suggesting that those with “broadest shoulders” would bear the brunt. “.
Financial impact and industry concerns
Officials from the Treasury are discussing the financial implications of these schemes with members of the British car industry. Canceling salary sacrifice plans could save the Treasury up to £100 million, according to estimates. Civil servants have reportedly recommended to Ms Reeves and her predecessors that the schemes be scrapped, although no final decisions have been made.
However, car industry leaders warn that scrapping salary sacrifice tax credits would severely hamper the UK’s transition to electric cars. James Court, chief executive of the Electric Vehicle Association, said: “Salary sacrifice is the only remaining government policy that helps workers meet the upfront cost of electric vehicles. Removing it before we reach price parity with gasoline cars would be extremely harmful.
A new electric car still costs around £12,000 more than a petrol or diesel car, a major hurdle on the way to achieving mass adoption. With the government committed to encouraging the use of electric vehicles as part of its wider decarbonisation goals, the potential removal of this financial support has raised concerns about reaching carbon reduction targets.
Who benefits from salary sacrifice?
The Decision Foundation claims that higher-rate taxpayers are currently receiving the most significant benefit from the scheme, with discounts of up to 62%. This compares to 28% for basic taxpayers, while lower-income earners often cannot participate due to rules that prevent their net income from falling below the minimum wage. The research center believes that advance announcement of the end of these tax breaks could accelerate demand for electric vehicles as motorists rush to take advantage of them before the changes take effect.
However, industry experts, including the British Vehicle Rental and Leasing Association (BVRLA), are skeptical that these schemes only benefit the wealthiest households. According to BVRLA data, around 52% of drivers using salary sacrifice are primary taxpayers, many of whom work in essential sectors such as health and social care, including NHS nurses.
BVRLA spokesperson Toby Poston defended the scheme, saying: “The salary sacrifice market is a huge success story and is key to achieving the UK’s ambitious decarbonisation targets. It helps to democratize access to zero-emission cars.
The future of electric vehicle adoption hangs in the balance
As the government looks to balance fiscal concerns with its environmental ambitions, any changes to salary sacrifice tax credits are likely to have major implications for the future of electric vehicle adoption in the UK. While Chancellor Reeves has yet to confirm her plans, industry leaders and environmental campaigners will be watching closely as the October 30 Budget approaches.
A Treasury spokesman declined to comment on speculation surrounding potential tax policy changes, saying: “We do not comment on speculation about tax policy changes outside of financial events.”