Salary sacrifice car schemes explained

Updated September 2026 · 10 min read

A salary sacrifice car scheme swaps part of an employee’s gross salary for a company car. Income tax and National Insurance are saved on the salary given up, and benefit in kind is paid on the car instead.

How does a salary sacrifice car scheme actually work?

The employer leases the car and provides it as a benefit; the employee agrees a permanent reduction in gross pay to fund it. Three points define it. First, it is a contractual change, not a deduction — HMRC is explicit that the employee's entitlement to cash pay must be varied, and the employment contract altered with each change (gov.uk, salary sacrifice and the effects on PAYE). A deduction from net pay after tax is not salary sacrifice and produces none of the saving. Second, the car is a company car: the employer holds the lease, the employer reports the benefit, and the employee pays benefit in kind on it. Third, gross pay after the sacrifice must not fall below the National Minimum Wage, which from 1 April 2026 is £12.71 an hour for workers aged 21 and over — the check is on post-sacrifice pay, and it has to be monitored, not assumed. FleetMe's agreement is with the employer's business; the employee never contracts with us.

Where does the saving actually come from?

From the fact that sacrificed salary is never earned, so it is never taxed. The employee gives up gross pay and therefore saves income tax at their marginal rate and employee National Insurance on the amount sacrificed, then pays benefit in kind on the car instead. The employer saves employer Class 1 National Insurance at 15% on the same reduced pay bill, and pays Class 1A at 15% on the (usually much smaller) benefit in kind figure (gov.uk, National Insurance rates and categories, 2026). Employers commonly use their Class 1 saving to cover the scheme's administration or to reduce the employee's monthly cost. The arithmetic only works if the benefit in kind is small — which is exactly why the vehicle choice is not incidental to these schemes. It is the whole design.

Why do electric cars dominate salary sacrifice?

Because of one narrow carve-out in the optional remuneration arrangement rules, and everything else follows from it. Since April 2017, most benefits provided by salary sacrifice are taxed on the greater of the cash equivalent of the benefit or the salary given up — which cancels the advantage. Cars with CO2 emissions of 75g/km or less are excluded from that comparison and continue to be taxed on the cash equivalent alone (HMRC Employment Income Manual, EIM44060). Combine that exclusion with a 4% appropriate percentage for a battery-electric car in 2026/27 and the result is stark: on a £40,000 EV the taxable benefit is £1,600 a year, while the salary given up might be £7,000. On a petrol car at 30%, the employee would be taxed on the higher of the two figures and the saving would largely disappear. That single rule is why virtually every UK salary sacrifice car scheme is an EV scheme. Detail in company car tax and BiK explained.

What does the arithmetic look like?

An illustration, with the usual caveat that it is arithmetic rather than a quote. Take a 40% taxpayer sacrificing £600 a month — £7,200 a year — for a £40,000 electric car. They give up £7,200 of gross pay, on which they would otherwise have paid roughly 40% income tax and 2% employee National Insurance, so around £3,024 of tax and NI is not paid. Against that they pay benefit in kind on a cash equivalent of £1,600 (4% of £40,000), costing them £640 at 40%. The employer's £7,200 reduction in gross pay saves £1,080 of employer Class 1 NI at 15%, and it pays £240 of Class 1A on the benefit. These are illustrative figures to show the mechanism, not a prediction and not an offer — real outcomes depend on the vehicle, the rate charged, the employee's actual marginal rate, pension interactions and student loan repayments. Ask your accountant and your payroll provider to model it on real numbers.

What happens if an employee leaves?

This is the risk that decides whether a scheme is a good idea, and it should be settled before the first order. The lease is between the employer and the lessor; the employee's salary sacrifice sits on top of it. If the employee resigns, is dismissed, is made redundant, goes on long-term sick leave or takes family leave, the salary they were sacrificing stops or falls — but the lease does not. Someone has to fund the remainder or pay an early termination charge, and that someone is contractually the employer unless the scheme rules say otherwise. Three practical consequences. Write the leaver policy first, covering resignation, redundancy, dismissal, long-term absence and family leave separately, because they are not the same case. Deducting a termination charge from final pay requires a clear, signed contractual authority and still cannot take pay below the National Minimum Wage. And ask what protection is available — early termination protection is commonly offered on scheme vehicles, at a cost built into the rate. See ending a van lease early for how termination charges work.

What else does sacrificing salary affect?

More than employees expect, and telling them up front is part of running a fair scheme. Reduced gross pay can reduce: pension contributions where they are a percentage of salary; statutory maternity, paternity and adoption pay, which are calculated on average earnings in the relevant period after the sacrifice; statutory sick pay and other earnings-related entitlements; death-in-service and income protection cover where the multiple is set against salary; and mortgage affordability, since the payslip shows the lower figure. Sacrifices also cannot normally be switched on and off at will — HMRC expects the contractual change to be genuine, with variation limited to defined life events such as marriage, divorce, redundancy or pregnancy (gov.uk). None of this makes a scheme a bad idea. It makes a one-page employee summary, written in plain English before anyone signs, a necessary part of one.

What did Autumn Budget 2025 change?

For cars, nothing — and that was the headline, because change had been widely expected. Salary sacrifice for cars was left untouched at Autumn Budget 2025; the measure that was announced caps National Insurance relief on salary-sacrificed pension contributions at the first £2,000 per person a year from 2029. Two other announcements do reach these schemes on a longer horizon. Company car appropriate percentages for zero-emission cars are already legislated to rise to 9% by 2029/30 (gov.uk, Income Tax: company car tax rates 2028 to 2030), which gradually raises the benefit in kind side of the calculation. And from April 2028 a per-mile charge for electric vehicles is to be introduced alongside vehicle excise duty, reported at 3p a mile for battery-electric cars and 1.5p for plug-in hybrids, rising with CPI. If you are launching a scheme on 48-month terms now, those are the numbers to model in year four rather than year one.

Is a scheme worth setting up for a smaller business?

Honestly, it depends on headcount and on your appetite for the leaver risk, and plenty of good businesses conclude no. A scheme earns its keep when there are enough employees for one early leaver not to be a material event, when payroll can handle contractual variations properly, and when the workforce actually wants electric cars. It works badly when a single departure would hurt, when there is no HR or payroll capacity to administer it, or when drivers cannot charge at home — an EV without home charging is a poor benefit whatever the tax says. Two simpler alternatives are worth pricing first: a company car provided directly to a director or key employee, which gets the same 4% treatment without any sacrifice machinery, or a car allowance plus mileage, which shifts the vehicle risk to the employee but brings the grey fleet obligations described in grey fleet explained.

This is general information, not tax advice

The above is general information about how UK salary sacrifice car schemes work, sourced to HMRC guidance and government publications and dated. It is not tax, employment or payroll advice. The outcome depends on your payroll arrangements, the employee's marginal rate and other deductions, your pension scheme rules, the exact vehicle and its CO2 figure, and the terms of the lease and the scheme documentation. Salary sacrifice also has employment law consequences, because it changes the contract of employment. Take advice from your accountant and, on the contractual side, from an employment specialist before you launch a scheme. What we can do is quote the vehicles in writing, ex-VAT with the inclusive figure alongside, with the maintenance element itemised, so the numbers your advisers need are on one page. Ask us for a quote.

FAQs

How does a salary sacrifice car scheme work?

The employer leases the car and the employee agrees a permanent reduction in gross pay to fund it. The employee saves income tax and National Insurance on the salary given up and pays benefit in kind on the car instead. It is a contractual change to pay, not a deduction from net pay.

Why are salary sacrifice schemes almost always electric cars?

Because cars emitting 75g/km of CO2 or less are excluded from the optional remuneration arrangement rules, so they are taxed on the cash equivalent rather than the higher of that and the salary given up (HMRC EIM44060). At a 4% appropriate percentage for 2026/27 the taxable benefit is very small.

What National Insurance is saved on salary sacrifice?

The employee saves employee National Insurance on the salary given up, and the employer saves Class 1 National Insurance at 15% on the same amount. The employer then pays Class 1A at 15% on the benefit in kind value of the car, which on an electric car is typically far smaller.

What happens to a salary sacrifice car if the employee leaves?

The lease continues, because it is between the employer and the lessor. The employer either funds the remaining term, redeploys the car to another employee or pays an early termination charge. Recovering that from an employee needs clear contractual authority and cannot take pay below the minimum wage.

Can salary sacrifice take pay below the minimum wage?

No. HMRC is explicit that a salary sacrifice arrangement must not reduce cash earnings below National Minimum Wage rates, and compliance is measured on post-sacrifice pay. From 1 April 2026 the rate for workers aged 21 and over is £12.71 an hour, so lower-paid employees may not be eligible.

Did the Autumn Budget 2025 change salary sacrifice for cars?

No. Car schemes were left unchanged. The announced measure caps National Insurance relief on salary-sacrificed pension contributions at the first £2,000 per person a year from 2029. Separately, company car percentages for electric cars rise to 9% by 2029/30 under rates already published.

Does salary sacrifice affect pension and statutory pay?

It can. Reduced gross pay may reduce salary-linked pension contributions, statutory maternity, paternity and sick pay, death-in-service multiples and mortgage affordability. Give employees a plain-English summary of these effects before they sign rather than after.

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