Written by Louis Sumner
An EV Salary Sacrifice Scheme is a fantastic way to drive away in a brand-new EV whilst making big tax and National Insurance savings. However, it’s important to understand the full picture like any financial decision. This is especially true when it comes to how it might affect your pension.
We get many clients here at P+B who ask about how the Scheme will affect their pension, so we’ve put together this article breaking down what you need to consider before you sign on the dotted line.
What does the impact look like?
It all comes down to how your pension is calculated. If your contributions are based on your pre-sacrifice salary, your pension remains completely unaffected, great news.
However, if they’re based on your post-sacrifice salary, your pension pot could be slightly smaller, simply because your salary (on paper) is lower. This matters most for Defined Benefit (DB) pensions, where your final pension is calculated using your average earnings over your career. A reduced salary now could mean a smaller pension later.
A reduced pension? Doesn’t sound ideal, but don’t panic. This won’t apply to everyone, and even if it does, there are simple ways to stay on track.
Does it differ depending on the type of pension scheme?
The impact on your pension will differ depending on the type of pension scheme you have. In the UK, there are two main types:
- Defined contribution (DC)
- Defined benefit (DB)
DC pensions, the most common, are influenced by contributions from both you and your employer, whereas DB pensions are based on your salary and years of service.
How EV Salary Sacrifice affects defined benefit pension schemes
DB pension schemes are funded by both employers and employees. They remain common in the public sector, such as for teachers, but are increasingly rare in the private sector.
In a DB pension scheme, your employer determines how much to contribute, managing both investment decisions and benefit payments. Your final pension amount is calculated based on two key factors:
- The number of years you’ve been part of the scheme.
- Your salary, usually your average career earnings or final salary at retirement.
For example, if you’re part of the Teacher’s Pension Scheme (TPS), your retirement income is based on your average career earnings. Upon retirement, you’ll receive a pension in one of two ways:
- Annuity payments – Monthly payments for life.
- A lump-sum payment – A one-time withdrawal of your total pension value.
If your EV salary sacrifice scheme is not approved by the government, it can impact your pension because:
- Salary Sacrifice reduces your taxable income.
- In a DB pension, your final or average salary is used to calculate your pension benefits.
- As a result, your retirement pension may be lower.
For example, a teacher enrolled in an unapproved EV Salary Sacrifice Scheme may see a reduction in the average salary used to determine pension benefits, potentially leading to a smaller pension in retirement.
How EV Salary Sacrifice affects Defined Contribution pension schemes
DC pension schemes are the most common type today. These are primarily funded by employees, with many employers offering to match contributions up to a certain limit. Unlike DB pensions, employers do not manage or guarantee the performance of these funds.
Employees are responsible for choosing how much to contribute, enrolling in the plan, and selecting investments from the available options. These funds grow tax-free until withdrawn during retirement.
EV Salary Sacrifice is unlikely to negatively affect a DC pension because contributions are typically calculated based on your salary before the sacrifice is applied. However, it’s always best to confirm with your employer or pension provider to ensure you are contributing at the expected level.
Does EV Salary Sacrifice affect your state pension?
Your State Pension entitlement is based on your National Insurance (NI) contributions over your working life. While almost everyone qualifies for a State Pension upon reaching retirement age, factors such as employment history and NI contribution gaps can influence the amount you receive.
EV Salary Sacrifice scheme is unlikely to impact your State Pension, as long as you:
- Earn above the Lower Earnings Limit (£6,396 per year, as of 2024).
- Continue making sufficient NI contributions.
You would need to earn very low wages or work minimal hours to fall below the qualifying threshold, making a significant impact unlikely for most employees.
What happens to my pension if I change jobs while enrolled in an EV Salary Sacrifice Scheme?
If you change jobs while enrolled in an EV Salary Sacrifice Scheme, your pension contributions may be affected. Since contributions are often based on your reduced salary, leaving your employer could mean:
- Your pension contributions stop until you enrol in a new workplace pension.
- If your new employer does not offer EV Salary Sacrifice, your contributions may be based on your full salary rather than the reduced salary under your previous scheme.
- You may need to opt into your new employer’s pension scheme, as auto-enrolment is not always immediate.
The bottom line
An EV Salary Sacrifice Scheme can be a great way to drive an EV at a reduced cost, but it’s important to understand how it might affect your future. The impact on your pension ultimately depends on your pension type and employer policies.
Still a bit unsure? We don’t blame you, it’s a big decision. Here are 3 actions we feel you should take before you put any pen to paper:
- Check your pension scheme rules with your team – If you’re business has an HR or payroll team, confirm with them how your contributions will be calculated and affected. You can also speak to your employer and pension provider to ensure you maximise your savings without compromising your long-term financial wellbeing.
- Plan for the future – If your DB pension is affected, consider increasing personal contributions to offset potential reductions.
- Speak to your Relationship Manager – If you’re considering enrolling in a scheme through P+B (or any other provider), make sure to bring any questions you have regarding how you will be personally affected, and we’ll do our best to assist you.
