Chancellor Rachel Reeves is reportedly considering the abolition of tax breaks for salary sacrifice schemes used by tens of thousands of drivers to lease electric vehicles (EVs).
This move could potentially deal a significant blow to the UK’s push towards widespread EV adoption. The Treasury is reviewing whether to scrap or modify these schemes, which allow employees to lease EVs by paying monthly instalments before income tax and National Insurance are deducted, offering considerable savings.
While the schemes have been credited with bolstering EV sales during a slowdown in new car demand, critics argue that they disproportionately benefit wealthier individuals. The Resolution Foundation, a think tank, has called for the removal of tax breaks for salary sacrifice and company cars, stating that the benefits largely accrue to high earners who can afford new vehicles.
Chancellor Reeves is expected to address these concerns in her first Budget on October 30. In the lead-up to the Budget, Reeves hinted that higher earners would face additional tax burdens, stating that those with the “broadest shoulders will be bearing the largest burden.”
The Financial Impact and Industry Concerns
Officials from the Treasury have been discussing the financial implications of these schemes with members of the British car industry. The abolition of salary sacrifice schemes could save the Treasury up to £100 million, according to estimates. Civil servants have reportedly recommended scrapping the schemes to Ms Reeves and her predecessors, though no decisions have been finalised.
Car industry leaders, however, are warning that removing salary sacrifice tax breaks would severely hinder the UK’s EV transition. James Court, chief executive of the Electric Vehicles Association, said: “Salary sacrifice is the one government policy remaining that helps working people bridge the upfront cost of EVs. Removing it before we reach price parity with petrol cars would be hugely damaging.”
A new EV still costs around £12,000 more than an equivalent petrol or diesel vehicle, a key hurdle in the path towards achieving mass adoption. With the government committed to encouraging EV uptake as part of its broader decarbonisation goals, the potential removal of this financial support has sparked concerns about reaching carbon reduction targets.
Who Benefits from Salary Sacrifice?
The Resolution Foundation argues that higher-rate taxpayers currently receive the most significant benefit from the scheme, with discounts of up to 62%. This is compared to 28% for basic-rate taxpayers, while lower earners often cannot participate due to rules preventing their net income from falling below the minimum wage. The think tank believes pre-announcing the end of these tax breaks could accelerate demand for EVs as motorists rush to take advantage before the changes take effect.
However, industry experts, including the British Vehicle Rental and Leasing Association (BVRLA), dispute claims that these schemes only benefit wealthier households. According to BVRLA data, around 52% of drivers using salary sacrifice are basic-rate taxpayers, with many employed in essential sectors like health and social care, including NHS nurses.
Toby Poston, spokesperson for the BVRLA, defended the scheme, stating, “The salary sacrifice market is a major success story and is central to the UK meeting its ambitious decarbonisation targets. It is helping to democratise access to zero-emission motoring.”
Future of EV Adoption in the Balance
As the government looks to balance fiscal concerns with its environmental ambitions, any changes to salary sacrifice tax breaks will likely have significant implications for the future of EV adoption in the UK. While Chancellor Reeves has not yet confirmed her plans, industry leaders and environmental advocates will be watching closely as the October 30 Budget approaches.
A spokesperson for the Treasury declined to comment on the speculation surrounding potential tax policy changes, saying: “We do not comment on speculation around tax policy changes outside of fiscal events.”