Rachel Reeves is considering getting rid of tax breaks for high-income individuals who purchase electric cars, as it is believed that these incentives mainly benefit the wealthy. The Chancellor is looking into potentially eliminating or altering workplace salary sacrifice schemes that allow tens of thousands of employees to lease electric vehicles. These schemes involve deductions from employees’ pay before taxes are taken out, and they have been instrumental in boosting EV sales during a period of reduced demand for new cars.
Officials from the Treasury have been in discussions with members of the British car industry to assess the financial impact of these salary sacrifice schemes. There have been suggestions to abolish these schemes in order to save the Treasury as much as £100 million. The Resolution Foundation has also called for the removal of these tax breaks, arguing that they primarily benefit affluent households who purchase new cars.
As the Government prepares for the upcoming Budget, Rachel Reeves has indicated that higher earners may face increased taxation. However, leaders in the car industry have cautioned against removing salary sacrifice tax relief, warning that it could negatively impact the transition to electric vehicles. The cost of a new electric car remains significantly higher than that of a traditional combustion engine vehicle, making it difficult for many working individuals to afford.
The Resolution Foundation highlighted that top rate taxpayers currently receive discounts of up to 62% through the salary sacrifice scheme, compared to 28% for basic rate taxpayers. Lower earners often cannot participate in these schemes due to restrictions that prevent their net incomes from falling below minimum wage levels. The think tank suggested that announcing the withdrawal of these schemes in advance could help drive demand for electric cars as people rush to take advantage of the incentives before they are discontinued.
While some argue for increasing taxes on petrol and diesel cars to encourage electric vehicle adoption, industry insiders have defended the salary sacrifice schemes. The British Vehicle Rental and Leasing Association emphasized that these schemes are increasingly utilized by households that would otherwise struggle to afford an electric vehicle. The majority of cars leased through salary sacrifice are electric, with over half of the drivers being basic-rate taxpayers, including those in the health and social care sector.
Transitioning to zero-emission transportation poses challenges for many sectors, and the salary sacrifice market plays a significant role in achieving the UK’s decarbonization goals. It facilitates new EV registrations and makes zero-emission motoring more accessible to a wider population. Despite speculation about potential tax policy changes, the HM Treasury has declined to comment on the matter outside of official fiscal events.