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Written by Rob Buckland
EV salary sacrifice car schemes are a great employee benefit, allowing your team to enjoy the latest electric cars with zero upfront cost, less hassle and savings of up to 40% over personal leasing. However, you need to understand the impact they may have on your pension, as our expert guide outlines.
Looking at an ? You might have heard horror stories about the impact it may have on any pensions you pay into. Let’s take a look at the various types of pensions you might have, as different setups will be impacted by salary sacrifice in different ways.
Types of Pension
Defined contribution pension
The most common type of pension scheme in the private sector is the defined contribution pension. Both employees and employers pay into these pensions, usually on a monthly basis. A set amount (above a minimum threshold) is taken from an employee's salary and paid into it, with the employer usually matching this amount. When you retire, you’ll receive the value of this pension fund.
Defined benefit pension
A defined benefit pension plan entitles you to a specific amount of money every year once you’ve retired. This amount is based on the salary you earned while you were working, which differs from defined contribution pension schemes where a percentage of your earnings is paid into a pension plan over time. Defined benefit pensions are most commonly offered to public sector employees, although some private companies do offer them - check with your HR department to find out.
State pension
Most people are entitled to a state pension once they reach a certain age. It is a regular payment from the government that is worked out based on your National Insurance record. Usually you’ll need at least 10 years of National Insurance payments to receive a state pension.
Defined benefit pensions & EV salary sacrifice schemes
Most defined benefit pensions are for public sector employees, such as the Local Government Pension Scheme, Police Pension Scheme or Teachers Pension Scheme. These are likely to be impacted by joining a salary sacrifice car scheme because they are usually not among the forms of sacrifice approved by the government.
What does this mean? Well, as salary sacrifice reduces your total earnings (from which your pension is calculated), it reduces the amount paid out from your pension during retirement. However, this impact can still be minimal, so it’s worth doing the sums to work out if it’s right for you.
For example: if you’re a police officer earning £40,000 a year considering opting into an EV salary sacrifice scheme, your savings can be worked out by multiplying the amount sacrificed each month with your monthly pension contribution, national insurance payment and income tax.
If you choose an electric car salary sacrifice deal that sees you pay £500 a month from your gross salary, you’ll also save 20% on income tax, 12% on National Insurance and 8.6% on pension contributions per month. Add , which is 2% of the car’s P11D value (list price) you’ll end up actually sacrificing £308 a month (or around £6,000 a year).
Sacrificing £6,000 of your £40,000 salary each year for three years in a 35 year career reduces your annual pension by around £315 - or around 1.28%. Obviously, if you stay on the salary sacrifice scheme for longer this reduction will increase, however.
Defined contribution pensions & EV salary sacrifice schemes
Things are much simpler if we’re talking about a defined contribution pension scheme - which is most private sector pensions. It is very unlikely your pension will be affected in this situation because your pension contribution is worked out before you’ve applied the salary sacrifice.
As a result, there’s no reduction to your contribution and the amount you are entitled to once you’ve retired. Simple, right?
State pension & EV salary sacrifice schemes
Like defined contribution pensions, it’s unlikely that any State Pension will be affected by joining a salary sacrifice scheme. As long as your annual salary still exceeds the Lower Earnings Limit (£533 a month in 2023/24) you’ll still qualify for the State Pension each year.
The only way you’d be affected is if your earnings are taken below this limit while you still earn over National Minimum Wage, which means you’d be working very few hours per week.
Conclusion
To summarise, the majority of working individuals can join a salary sacrifice scheme and have either little or no impact at all to their pension contributions.
The only time where this isn’t the case is with defined benefit pensions (i.e most public sector pensions) which can have a small impact on the total amount you receive when you retire. In rare circumstances your State Pension can also be affected, but for the vast majority of people this isn’t the case.
For wider tax implications, you can read our guide on
