About Author
Daanyaal Mahmood
I write about electric cars, schemes, and how they actually work.
Acquiring a vehicle through salary sacrifice can be daunting, even more so when you’ve not used our scheme before. So let’s give you all of the knowledge you need to make an informed decision!
What is a Salary Sacrifice Car Scheme? Does it Work?
Salary sacrifice car schemes allow employees to give up their salary in exchange for a factory-fresh car.
(The top savings come when you salary sacrifice an electric vehicle.)
For a deeper look at how car schemes work, including Benefit-in-Kind rates, visit our full guide: Salary Sacrifice Cars: How Do They Work?
Salary sacrifice works because the deduction occurs before any of your tax and National Insurance, so your ‘salary’ will decrease alongside your tax liability. Your employer will lease the vehicle and pass the cost on to you via your payroll.
With salary sacrifice you get access to a tax-efficient lease with extra benefits like:
- No deposits
- Insurance, servicing, tyres and maintenance
- Lower Income Tax and NI
| Example | Without Salary Sacrifice | With Salary Sacrifice (£400/month) |
|---|---|---|
| Gross Annual Salary | £40,000 | £35,200 |
| Income Tax (20%) | £8,000 | £7,040 |
| NI (8%) | £3,200 | £2,816 |
| Total Tax/NI | £11,200 | £9,856 |
| Annual Saving | – | £1,344 |
What Can You Get Through Salary Sacrifice?
Salary sacrifice is used across many employee benefits and not just for electric vehicles. Here are some of the most notable employee benefits which utilise salary sacrifice:
- Cycle to Work schemes: you can offer bikes and safety gear with no tax or NI.
- Pension Contributions: boost your retirement fund tax-efficiently
- Childcare Vouchers: These aren’t available anymore, but they were previously offered with no tax or NI.
- Tech and Lifestyle benefits: Allows employees to purchase furniture, appliances and even tech through salary sacrifice which leads to savings on Tax and NI.
All these benefits have different HMRC rules, but generally they follow the same principles and help you save by reducing your taxable salary.
Your employer needs to be setup with us, and the salary sacrifice your looking at shouldn’t take you below minimum wage to be eligible.
Employers Introducing the Scheme
Employees Going Green
How Does Salary Sacrifice Affect Tax and National Insurance?
Employees: Tax and NI are calculated after your salary sacrifice, meaning you effectively get the benefit for less than the retail cost.
Employers: NI contributions are reduced, which gives them the option to reinvest the savings into different staff perks and incentives.
In practice, if you sacrifice £500 monthly for an electric car (for a year) you can save up to £3,000 in combined tax and NI depending on your tax bracket.
Salary Sacrifice Car Scheme Explained
Although salary sacrifice has been around for years, the electric vehicle salary sacrifice scheme has recently become the most popular type of employee benefit.
The ability to lease an electric vehicle at a lower cost with servicing, tyres and maintenance included is a huge advantage. You can choose what’s included in your scheme for example, you can opt out of insurance if preferred.
| Tax Year | EV BIK Rate | Plug-in Hybrid (0–50g/km) | Petrol/Diesel (50g/km+) |
|---|---|---|---|
| 2024–25 | 2% | 8–14% | 25–37% |
| 2025–26 | 3% | 9–15% | 26–37% |
| 2026–27 | 4% | 10–16% | 27–37% |
How Does Salary Sacrifice Work?
Your company leases the vehicle from us and you repay the lease cost through a pre-tax deduction. You’ll still pay Benefit-in-Kind (BIK) tax but EVs have a BIK rate of 3%, which is the lowest BIK for a vehicle.
If your EV had a list price of £40,000 and a 3% BIK rate, the taxable benefit would be £1,200 annually for a basic taxpayer.
Is Salary Sacrifice Worth it?
Generally, we’d say it’s worth it when using salary sacrifice for pensions and electric vehicles. Of course, we’re slightly biased towards the EV side of salary sacrifice (as a salary sacrifice company) but the facts don’t lie!
Here is an example of your real-world savings with salary sacrifice for electric cars
| Taxpayer Type | Annual Salary | Typical EV Value | Estimated Annual Saving |
|---|---|---|---|
| Basic Rate (20%) | £35,000 | £35,000 | £1,500–£2,000 |
| Higher Rate (40%) | £55,000 | £40,000 | £2,500–£3,500 |
Insight: Your gross salary will look lower on paper however your real-world disposable income usually increases because of your tax savings.
Employers Introducing the Scheme
Employees Going Green
Salary Sacrifice For Employers
Salary sacrifice also helps employers save money through national insurance contributions. This is because employees’ gross salary is reduced so employers NI contributions will also be reduced.
Employee benefits can also boost employee retention rates and engagement. Make your staff feel valued with employee benefits and you’ll see retention stats improve.
Companies with over 500 staff, a turnover exceeding £500 million, or those that are publicly listed must complete an ESG report. Salary sacrifice can help reduce their Scope 3 emissions by lowering fleet emissions. These emissions convert indirect travel and activities not owned or controlled by the company, such as employees’ travel and commuting. Under our salary sacrifice scheme this drastically drops as we only provide electric and some low-emission hybrid vehicles.
Salary Sacrifice vs Car Allowance: Which Is Better for Tax?
With salary sacrifice, payments come from your gross salary, lowering your tax and National Insurance, and you pay a small Benefit-in-Kind (BIK) charge on the car.
With a car allowance, the money is paid as cash and taxed like normal income, meaning less take-home pay.
In short: Salary sacrifice is usually more tax-efficient for EVs, while a car allowance offers flexibility but fewer savings.
Although this is a comparison, you can use your car allowance for a salary sacrifice EV and get the best of both worlds!
| Feature | Salary Sacrifice (EV) | Car Allowance |
|---|---|---|
| Paid From | Gross pay (pre-tax) | Net pay (post-tax) |
| Income Tax & NI | Reduced | Fully payable |
| Company Car Tax (BIK) | Yes, very low for EVs (3% currently) | None |
| Typical Inclusion | Insurance, servicing, tyres | You cover all costs |
| Ownership | Employer lease | Personal vehicle |
Top Myths About Salary Sacrifice
1st Myth: ‘You Lose Out On Your Pension’
- In reality, you generally don’t lose any of your pension as it’s taken out of your wage before electric vehicle salary sacrifice. Also, many companies use a notional salary when calculating pension contributions. You always want to check with your company, the HR department should be the best place to get more of an insight into your own company.
2nd Myth: ‘You still pay full tax on an EV’
- You do have to pay tax on electric cars however it’s much, much lower than a petrol or diesel car. This is because electric vehicles are classed as company vehicles so they’re charged BIK costs, which are at 3% rate currently.
- If you decide to get an EV worth £40,000 your BIK would be around £20 a month.
3rd Myth: ‘It’s Too Complex For Payroll’
- In the past it may have required much more work but now they can be integrated and compliance checked to meet standards.
4th Myth: ‘Salary Sacrifice affects my ability to get a mortgage’
- When applying for a mortgage lenders usually assess based on your ‘Headline Income’ and look at total employee benefits. You can request a pre-sacrifice salary which can help paint a complete picture for lenders. Once they see the full financial picture most applicants experience no negative impact.
5th Myth: ‘It’s Only For High Earners’
- Both basic and higher rate taxpayers can obtain vehicles through salary sacrifice.
Get in Touch
Fleet Evolution offers innovative salary sacrifice schemes, helping employers and employees save on costs while promoting eco-friendly electric cars. Enjoy easy setup, free maintenance, and swift activation for any company size.
FAQs
Salary sacrifice is an agreement between you and your employer to give up part of your gross salary (before tax and National Insurance) in exchange for a non-cash benefit - in this case, an electric car.
Your employer leases the car; you repay via a pre-tax deduction through payroll. You also pay a small company car tax called Benefit-in-Kind (BIK).
EVs have very low BIK rates because of their lower tailpipe emissions compared with petrol/diesel, so the company car tax you pay is much smaller.
Yes—BIK tax on the car’s “taxable value.” The salary reduction lowers your Income Tax/NI; the BIK is usually far less than the savings on EVs.
Typical savings range from ~£1,500–£3,500 per year depending on salary, car, and employer policy. Use your provider’s calculator for a personalised figure. You can save upto 40% on an electric vehicle.
Most employers base pension contributions on your notional (pre-sacrifice) salary, so there’s usually no reduction—check your scheme rules.
No. Employers must ensure the sacrifice does not take you below the National Minimum/Living Wage.
Your gross pay may appear lower, but lenders often consider the full package. HR/your provider can supply a letter explaining the arrangement.
BIK = (car’s list price × BIK %) × your income tax rate. EVs have low BIK %, so monthly tax is typically modest.
Schemes usually have early-termination rules/fees. We do have protections in place for some circumstances, contact us for more info!