what-is-a-car-salary-sacrifice-scheme-and-how-does-it-work

car-salary-sacrifice-scheme

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.<h3 dir="ltr">What is salary sacrifice?</h3>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 <a href="https://www.whatcar.com/advice/owning/company-car-tax-guide/n9352">Benefit-in-Kind (BIK)</a> tax if the benefit is a car you can use privately, but with an electric car or a <a href="https://www.whatcar.com/best/plug-in-hybrid-cars/n22743">plug-in hybrid</a>, 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.

<h3 dir="ltr">How does salary sacrifice work for cars?</h3>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 <a href="https://www.whatcar.com/best/electric-cars/n17000">electric cars</a> 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.<h3 dir="ltr">Advantages of salary sacrifice</h3>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.<h3 dir="ltr">Disadvantages of salary sacrifice — and the traps to avoid</h3>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 <a href="https://www.whatcar.com/advice/buying/everything-you-need-to-know-about-car-leasing/n19720">car lease</a>. And remember: you’re paying to use the car, not to own it; there’s no equity at the end.

<h3 dir="ltr">Who can use salary sacrifice?</h3>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.<h3 dir="ltr">What’s usually included in a car salary sacrifice bundle?</h3>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. <a href="https://www.whatcar.com/news/best-home-ev-chargers/n25830">Home-charger</a> deals or discounted <a href="https://www.whatcar.com/news/electric-car-charging-networks-rated/n23269">public charging</a> 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.<h3 dir="ltr">Salary sacrifice vs company car allowance, PCP or personal lease</h3>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 <a href="https://www.whatcar.com/advice/buying/everything-you-need-to-know-about-car-leasing/n19720">car lease</a> 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. <a href="https://www.whatcar.com/advice/buying/personal-contract-purchase-pcp-explained-car-finance-guide/n19714">PCP deals</a> 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.

<h3 dir="ltr">What happens if you leave, change hours or take parental leave?</h3>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.<h3 dir="ltr">The bottom line on salary sacrifice</h3>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.<hr />For all the latest reviews, advice and new car deals, sign up to the What Car? newsletter <a href="https://pages.haymarket.com/whatcar/wcar-form.html">here</a>Read more: <a href="https://www.whatcar.com/news/best-company-cars/n22605">Best company cars</a>

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

car salary sacrifice scheme

van-and-pick-up-tax-ved-and-bik-tax-rates-explained

van-tax-guide

The good news is that van tax is pretty easy to get your head around, so there’s not much to worry about. Pick-up truck tax changed significantly in April 2025, however, making headlines when the government imposed big changes on <a href="https://www.whatcar.com/news/government-tweaks-definition-of-pick-up-trucks-affected-by-company-car-tax/n27221">how double-cab models are taxed</a>.There are two main areas of van tax you’ll need to deal with: <a href="https://www.whatcar.com/advice/owning/how-much-is-car-tax-ved-rates-explained/n1153">vehicle excise duty (VED)</a>, which is also known as road tax, and <a href="https://www.whatcar.com/advice/owning/company-car-tax-guide/n9352">benefit-in-kind tax</a>, more commonly referred to as BIK. There are also benefits when it comes to capital allowances, which we’ll also delve into later.We’ll guide you through the ins and outs of all three types of tax, using the van tax rates and rules that apply until the end of the 2025/26 tax year, so you’ll know exactly what you need to pay and when to remain on the right side of both His Majesty’s Revenue and Customs (HMRC) and the law.We’ll also break down the rules that apply to pick-up trucks, electric vans and self-employed van drivers.<hr />

<h2 dir="ltr">What vehicles are classed as vans for VED?</h2>A vehicle will be categorised by HMRC as a van so long as its main purpose is to carry goods rather than passengers, and it has a gross weight of less than 3500kg when fully laden. So, models such as a <a href="https://www.whatcar.com/ford/transit-custom/van/review/n18288">Ford Transit Custom</a> or a <a href="https://www.whatcar.com/vauxhall/vivaro/van/review/n18281">Vauxhall Vivaro</a> are popular examples of models classed as vans. This rule also covers car-derived vans such as the <a href="https://www.whatcar.com/toyota/corolla/estate/review/n24583">Toyota Corolla Commercial</a>. However, some vehicles fall outside this classification, notably vans with extra rows of seats and, from April 2025, double-cab pick-up trucks.The vehicle's V5C registration document will tell you all you need to know – search for the European classification – if it’s classed as N1 or N2 it will be taxed as a van, but M1 or M2 signifies that it’s a dual-purpose vehicle, and therefore classified as a car for taxation purposes. The <a href="https://www.gov.uk/">Government's website</a> offers additional advice on how a vehicle is classified as a car or a van.Read more:<a href="https://www.whatcar.com/news/best-medium-vans/n20726"> The best medium vans</a> &gt;&gt;<hr /><h2>How much is van VED (road tax)?</h2>You must pay the fee for VED annually or every six months, and working out how much you’ll have to pay HMRC is comparatively simple.Van road tax is covered by a flat-rate annual charge of £345 in the 2025/26 tax year, unlike the fee for company cars that’s based on CO2 emissions. HMRC also offers the ability to pay by Direct Debit, which you can do in one lump sum or in 12 monthly payments. However, opting to pay in 12 instalments will cost you more, at £362.25 for the year.It’s worth noting that if you  opt to pay on a six-monthly basis, you’ll pay £189.75 twice per year, so £379.50 in total.Some vans were subject to some discounted rates; while those regimes have since been rescinded, those eligible models still attract the lower rate. So, if you run a <a href="https://www.whatcar.com/advice/owning/euro-1-to-euro-6-how-clean-is-my-car/n1190">Euro 4-compliant</a> van that was registered between 1 March 2003 and 31 December 2006, or a <a href="https://www.whatcar.com/advice/owning/euro-1-to-euro-6-how-clean-is-my-car/n1190">Euro 5-compliant</a> van registered in 2009 or 2010, you’ll pay an annual VED fee of £140, or a six-monthly fee of £77.These same rules still apply to single-cab pick-up trucks, but since April 2025 double-cab pick-ups with a payload of over one tonne are taxed at the same rate as company cars, following a change in how they are treated by the government. Double-cabs now face an annual VED bill of £195, unless the vehicle has a list price of more than £40,000, in which case an extra £425 will be added to the annual VED bill for five years from the start of the second year.Read more: <a href="https://www.whatcar.com/news/best-large-vans/n20727">The best large vans</a> &gt;&gt;<hr />

<h2 dir="ltr">How much is VED (road tax) for an electric van?</h2>Electric vans used to be exempt from VED payments, but this changed in April 2025. Zero-emission vans now cost £345 per year to tax, bringing them inline with petrol and diesel models. Even if you buy or own an electric van first registered between March 2001 and the rule change, it will incur the £345 annual VED bill when it’s renewed.<h2 dir="ltr">Do I need to pay benefit-in-kind on a company van?</h2>You will be liable for Benefit-In-Kind (BIK) tax on a van if you use it for private journeys as well as work ones.The amounts aren’t set in stone, however, because if you’re unable to use the van for 30 days in a row, or if you reimburse your employer for the cost of your private journey in the works van, then these figures will be lessened. And if you’re an employer, you must also remember that you have National Insurance to pay on the BIK figure.Better still, if you only ever use the van for work journeys, or if you’re a self-employed worker, then you are not liable for BIK tax. The only thing you need to do is to ensure that the van’s VED is paid.Read more: <a href="https://www.whatcar.com/news/company-car-tax-guide/n9352">BIK tax explained</a> &gt;&gt;<h2 dir="ltr">What Car? Van tax calculator</h2>We’ve made it easy to work out how much you’ll have to pay HMRC each year through our <a href="https://www.whatcar.com/news/van-tax-calculator">van tax calculator</a>. Simply choose the make and model of your van using the drop-down menus, then the engine, and our calculator will let you know exactly how much you’ll have to pay each year.If you’re in any doubt about the size of bill you’ll face, our calculator will set your mind at ease within seconds.

<h2 dir="ltr">Who pays the road tax on a company van?</h2>The van's registered keeper is responsible for ensuring that the annual VED fee has been paid. So, if you’re a sole trader, that task will be up to you, but a larger company will rely on a fleet manager for this, because all vans will be registered to the business.It’s easy to find out when a vehicle's road tax is due – simply look it up using the Government's <a href="https://www.gov.uk/check-vehicle-tax">Check Vehicle Tax page</a>.<h2 dir="ltr">How much is BIK tax on a company van?</h2>The BIK tax rate on a van is set at a flat rate of £4020 until the end of the 2025/26 tax year. The good news is that if you’re an employee, you don’t have to pay that full amount. Your personal tax bill will be based on whether you’re a 20% or 40% taxpayer – so if you’re in the lower bracket you pay tax on 20% of £4020, which equates to £804, or £67 per month. A 40% taxpayer will face an annual bill of £1608, or £134 per month.However, if your company pays for private fuel use by giving you a fuel card, then an additional BIK fuel benefit charge applies. The 2025/26 fuel benefit charge is £769 and the same 20% or 40% calculation applies here.So, 20% taxpayers will need to pay a bill of £154 (Just shy of £13 per month), while this increases to £308 (around £25 per month) for 40% taxpayers.<h2 dir="ltr">What is classed as private use for a work van?</h2>Again, if you’re self-employed, then you can use your van for private journeys without incurring BIK tax. However, if you are using a van provided by your employer, then you’ll be liable for BIK tax if you drive it for private journeys outside of your normal working hours.What constitutes a private journey? Well, HMRC does allow some leeway for what it calls “insignificant private use”. This means that an employee is allowed to take the van home at the end of the working day, and make the odd personal journey, such as stopping to get food on the way home, or making a trip to the doctor. However, regular journeys, such as dropping off the kids at school, are not within the rules, so you’ll be liable for BIK tax.And while it might be tempting to bend the rules (you may think, how could HMRC possibly find out?), this could be foolhardy. Most modern vans have some form of tracking technology or cameras fitted, and the law demands that your employer tell HMRC if you’re using the vehicle for personal journeys.Read more:<a href="https://www.whatcar.com/news/best-small-vans/n20723"> The best small vans</a> &gt;&gt;<hr />

<h2>What are the tax rates on electric vans?</h2>The Government is keen to get businesses to ditch their diesel vans and switch to electric power, and to that end, it has set the BIK tax rate for vans at £0. Better still, there’s no fuel benefit charge either, so long as electricity for charging is provided by your employer.If all that isn’t enough to make you want an <a href="https://www.whatcar.com/news/best-electric-vans/n21136">electric van</a>, then consider this – there’s no charge at all for private use, so you won’t have to pay a penny in tax for using your van as much as you want.Read more: <a href="https://www.whatcar.com/news/best-electric-vans/n21136">The best electric vans</a> &gt;&gt;<h2 dir="ltr">What are the tax rates on plug-in hybrid vans?</h2>While there are significant BIK savings for electric-van drivers, the same cannot be said for plug-in hybrid vans, which are taxed at the same rate as a diesel van.<hr />

<h2>What are the tax rules on pick-up trucks?</h2>If you plan to use a <a href="https://www.whatcar.com/best/pick-up-trucks/n19493">pick-up</a> truck for your work, there are a few things to consider.The easiest option from a taxation point of view is to choose a single-cab pick-up, which has just two doors and two or three seats in one row. Such trucks are classified as light commercial vehicles (LCVs) by HMRC, regardless of the payload weight they can carry, so these are taxed in exactly the same way as a van (see earlier).There’s more to think about if you plan to invest in a two-door extended-cab or four-door double-cab pick-up, which have longer cabs with a second row of seats. While previously double-cab pick-ups with a payload capacity of more than 1000kg enjoyed the same taxation rules as a van, controversial rule changes came into force in April 2025. HMRC now considers pick-ups with two rows of seats to be primarily for carrying passengers rather than cargo, which you can read more about in our <a href="https://www.whatcar.com/advice/owning/company-car-tax-guide/n9352">company car tax guide</a>.The upshot of this is that double-cabs are now taxed as company cars instead of commercial vehicles, with varying rates based on CO2 tailpipe emissions instead of a single tariff. With most pickups in the top 37% BiK band, a 40% taxpayer is now liable for a charge of almost £10,000 per year. To help alleviate the price hike, you can consider a pick-up with lower emissions such as the <a href="https://www.whatcar.com/ford/ranger/4x4/review/n17250">Ford Ranger</a> plug-in hybrid or an electric model.Read more: <a href="https://www.whatcar.com/best/pick-up-trucks/n19493">The best pick-up trucks</a><h2>Self-employed status and van tax</h2>If you run your own business and use your vehicle for work, HMRC allows you to claim a few expenses relating to your van. These include:- Vehicle insurance - Repairs and servicing - Fuel - Parking - Hire charges - Vehicle licence fees - Breakdown coverThings you cannot claim for are fines for parking or driving offences, or your travel expenses while commuting. Personal/non-business travel costs are also forbidden.<hr /><h2>Frequently asked questions</h2>Is it worth having a company van?A company van can be a solid business investment – especially if it’s essential for your operations (e.g. tradesperson, couriers). The main financial benefits include capital allowances (more on this below) and minimal BiK liability for most genuine work vans that aren’t used for personal travel.Is a work van 100% tax deductible?Unlike cars, vans qualify for annual investment allowance (AIA), which means a business can deduct the full value of an item from its profits before tax. This also applies to zero-emissions vans.However, there are some caveats. If a van has rear seats (often called a crew or combi van), it may not qualify if it has a payload of less than one tonne in the cargo area or if the passenger area is larger than the cargo space.New guidance on double-cab pick-up trucks that came into force from April 2025 also means they are now treated similarly to company cars instead of commercial vehicles.Is company van tax changing?Taxation for company vans has been announced for the 2025/26 tax years, but beyond that the Chancellor could bring in changes. These are unlikely to be seismic, however, as the government is unlikely to want to unduly penalise businesses that use vans to keep the economy growing.<h2>Read more <a href="https://www.whatcar.com/class/vans">commercial van advice &gt;&gt;</a></h2><hr />For all the latest reviews, advice and new car deals, sign up to the What Car? newsletter <a href="https://pages.haymarket.com/whatcar/wcar-form.html">here</a>

Andrew Goodwin

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