Businesses can use salary sacrifice schemes that provide electric cars to reduce employees’ exposure to the ever-widening 40% tax trap, Fleet Evolution has highlighted.

Fleet Evolution founder and managing director Andrew Leech

One in five of all tax-paying adults will be liable for higher-rate income tax by the 2027 tax year, according to latest data from the Institute for Fiscal Studies.

This figure includes one in four teachers and one in eight nurses and quadruples the number of 40% taxpayers in the early to mid-1990s.

It’s the result of the six-year freeze in income tax allowances and thresholds announced by Chancellor Jeremy Hunt in the 2022 Budget Statement.

The failure of tax allowances and thresholds to keep pace with inflation is known as “fiscal drag”. It’s been branded as the “ultimate stealth tax”.

But latest analysis from Fleet Evolution shows that an electric car leased through a salary sacrifice scheme can save income tax – while for employees with children it can also help protect valuable childcare benefits.

Founder and managing director Andrew 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.”

He added 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.

“The MG4 via salary sacrifice is already tremendous value, coming in at £100 a month less than the cost of keeping a five-year-old diesel Astra on the drive.

“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.”

Leech added that there were other benefits to investments, savings and other taxable income. Electric cars also currently benefit from low Benefit-in-Kind taxation, making 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.”

The Fleet Evolution salary sacrifice car scheme incorporates an array of cost-saving benefits for employees, including all servicing and repair costs, road fund licence, fully comprehensive insurance, corporate discounts and no deposit.