What is a car salary sacrifice scheme and how does it work?

Salary sacrifice is a simple idea with big consequences for your take-home pay. You agree to give up part of your gross salary and, in return, your employer provides a non-cash benefit. For drivers, that usually means a brand-new car on a lease, most often an electric one, with the payments taken from your pay before Income Tax and National Insurance are calculated. 

Done well, it’s one of the cheapest ways into a new EV. Done badly, it could trip up your finances. Here’s how to get it right.

What is salary sacrifice?

In plain English, it’s a contract change between you and your employer where you swap some cash pay for a benefit. Because your cash salary is reduced, your tax and National Insurance are based on the lower figure. 

You’ll still pay Benefit-in-Kind (BIK) tax if the benefit is a car you can use privately, but with an electric car or a plug-in hybrid, that BIK charge is currently very modest. 

Salary sacrifice is not a government “scheme” you apply for; your employer has to offer it and set the rules.

How does salary sacrifice work for cars?

Most employer car salary sacrifice plans are simply contract-hire leases in the company’s name, bundled with insurance, servicing, replacement tyres, breakdown cover and vehicle tax. Your monthly sacrifice comes off your gross salary, then you pay BIK based on the car’s CO2 emissions and list price (the P11D value). 

From April 2025, fully electric cars attract a 3% BIK rate for 2025/26, rising to 4% in 2026/27 and 5% in 2027/28 unless the government changes course. That’s why EVs dominate salary sacrifice: the BIK is far lower than for similar petrol or diesel cars.

There’s also a special rule called Optional Remuneration Arrangements (OpRA). For most benefits, HMRC taxes whichever is higher: the value of what you gave up or the normal BIK amount. Cars emitting 75g/km CO₂ or less are exempt from that “higher of” comparison, so their normal (and usually low) BIK applies. Pick a higher-emission car and the tax advantage can disappear.

Advantages of salary sacrifice

The headline attraction is total cost. Because the sacrifice comes off your gross pay, you save Income Tax and National Insurance; your employer also saves employer’s National Insurance. 

Bundled running costs make budgeting easier, and you don’t need a deposit or personal credit check because the lease sits with your employer. For EVs registered from 1 April 2025, vehicle tax is now due but is typically included in the monthly price, so there should be no surprises.

Disadvantages of salary sacrifice — and the traps to avoid

The National Minimum Wage floor is non-negotiable. If a salary sacrifice would push your cash pay below the legal minimum, you can’t take part. 

Sacrificing salary can also reduce or remove earnings-related entitlements, such as statutory maternity, paternity or adoption pay, because those are calculated from your average cash earnings before tax. It can lower student-loan deductions while you’re in the scheme, which feels good month to month but may simply lengthen the repayment period. Mortgage lenders often assess affordability on your reduced salary figure, too, so you may qualify for a smaller loan than you otherwise would.

There are also scheme-specific risks. If you resign or are made redundant mid-term you may face early-termination fees unless your employer has built in protection. Damage charges at the end of the lease work much like any other car lease. And remember: you’re paying to use the car, not to own it; there’s no equity at the end.

Who can use salary sacrifice?

Only employees whose employer offers it. Public-sector bodies and big private firms have been quickest to roll out EV sacrifice plans, but many SMEs offer them now. Employers typically exclude those on probationary periods or very short-term contracts. 

Because the agreement is between the employer and the leasing provider, individual credit checks are uncommon; eligibility is driven by your employment status and pay level rather than your personal credit score.

What’s usually included in a car salary sacrifice bundle?

Most packages roll insurance, servicing, maintenance and replacement tyres, breakdown cover, and vehicle tax into one monthly figure, with the warranty handled as usual by the car’s manufacturer. Home-charger deals or discounted public charging are sometimes offered, but those perks vary by employer and provider. Always read the driver handbook and check exactly what is – and isn’t – covered.

Salary sacrifice vs company car allowance, PCP or personal lease

If your employer gives a cash allowance instead of a car, that’s simply extra salary and fully taxable; you’d then fund a personal car lease or personal contract purchase (PCP) from your net pay. Salary sacrifice takes the cost before tax and NI and applies BIK instead, which is why it can win for low-emission cars. 

PCP deals can build ownership at the end if you stump up for the final balloon payment, but you won’t get any of the pre-tax advantages. Personal leases look similar on the surface, yet every pound comes out of post-tax pay and you’ll arrange your own insurance and maintenance unless you add them at extra expense.

What happens if you leave, change hours or take parental leave?

Leaving mid-term is the big concern. Some employers buy early-termination insurance so that redundancy, long-term sickness or other life events are covered after a qualifying period. Without that protection, you could be billed for an early-exit charge. If your hours drop or you take statutory parental leave, the National Minimum Wage test can bite. Employers may pause the scheme or require the car’s return if your reduced cash pay can no longer support the sacrifice. Clarify these scenarios before you sign a salary sacrifice contract.

The bottom line on salary sacrifice

For the right person looking for a low-emissions car, salary sacrifice is a powerful way to cut the cost of new-car motoring – especially with an EV while BIK rates remain low. The trick is to stress-test the downside: check the minimum-wage position, model the impact on statutory pay, student-loan deductions and mortgage affordability, and read the small print on early termination. If those all stack up, it’s hard to ignore the perks a salary sacrifice deal can provide.

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