What a salary sacrifice car scheme is
Under a salary sacrifice car scheme your employer leases a car and you agree to a lower gross salary in return for using it. The reduction in pay is usually spread over the length of the lease, commonly three or four years, and typically covers the rental plus servicing, maintenance and sometimes insurance.
Because you never receive the sacrificed pay, you do not pay income tax or employee National Insurance on it. Instead you pay tax on the car as a benefit in kind, based on its list price and emissions. That swap is where the saving comes from.
This site is information only and does not run or arrange any scheme. Terms differ between employers and providers, so treat this guide as the background you need to read your own paperwork.
Where the tax and National Insurance saving comes from
Normally you would pay for a lease out of net pay, after income tax and National Insurance have already been taken. Under a scheme the rental comes out of gross pay, so the cost is reduced by your marginal rates.
A basic rate taxpayer saves 20% income tax and 8% employee National Insurance on the sacrificed amount. A higher rate taxpayer saves 40% income tax and 2% National Insurance, because earnings above the upper earnings limit are charged at the lower NI rate. Additional rate taxpayers save 45% and 2%. These are the rest of the UK rates used in our company car tax calculator; Scottish income tax bands differ.
Against that you pay benefit in kind (BIK) tax on the car. The saving is therefore the tax and NI avoided on the sacrificed pay, minus the income tax due on the car's taxable value.
| Taxpayer | Income tax saved | Employee NI saved | Total saving on sacrificed pay |
|---|---|---|---|
| Basic rate | 20% | 8% | 28% |
| Higher rate | 40% | 2% | 42% |
| Additional rate | 45% | 2% | 47% |
Company car tax rates for electric cars to 2029/30
BIK tax is the car's P11D value (list price plus delivered options, before any discount) multiplied by an appropriate percentage, then taxed at your income tax rate. For a zero emission car the percentage is deliberately low. The figures below come from HMRC's published schedule and its policy paper setting the rates for 2028/29 and 2029/30.
The rise is gradual rather than sudden, which is why electric cars remain the main use of salary sacrifice. The company car tax calculator also shows the percentages for petrol, diesel and plug-in hybrid cars.
| Tax year | Electric car BIK percentage |
|---|---|
| 2025/26 | 3% |
| 2026/27 | 4% |
| 2027/28 | 5% |
| 2028/29 | 7% |
| 2029/30 | 9% |
The OpRA rules and why they matter
Since April 2017 the optional remuneration arrangement (OpRA) rules have limited the advantage of swapping pay for benefits. Where an employee can choose between cash and a benefit, the benefit is taxed on the higher of the salary given up and the normal taxable value of the benefit.
For a car that is not an ultra-low emission vehicle, the normal BIK value is usually far below the sacrificed pay, so you are taxed on the sacrificed amount and the saving disappears. HMRC exempts cars with CO2 emissions of 75g/km or less, which in practice means electric cars and some plug-in hybrids. Those are taxed on the ordinary BIK basis.
Check the CO2 figure on the specific car and how your employer treats it. HMRC's OpRA guidance is the authoritative source if you are unsure whether a vehicle qualifies.
- Electric cars: taxed at the low BIK percentage, so the scheme can deliver real savings.
- Plug-in hybrids at 75g/km or below: eligible for the exemption, but the BIK percentage is higher and depends on electric range.
- Petrol and diesel cars above 75g/km: taxed on the pay given up, so little or no saving.
Worked illustrations
Take an electric car with a P11D value of £40,000 in 2026/27. The BIK percentage is 4%, so the taxable benefit is £1,600 a year. Assume, purely for illustration, that the sacrificed salary comes to £4,800 over the year (a monthly sacrifice of £400 including insurance and servicing). Real figures vary by provider and car.
A basic rate taxpayer saves 28% of £4,800, which is £1,344, then pays 20% tax on the £1,600 benefit, which is £320. The net cost of the car is £4,800 minus £1,344 plus £320, or £3,776. That is about 21% less than the headline sacrifice.
A higher rate taxpayer saves 42% of £4,800, which is £2,016, then pays 40% on £1,600, which is £640. The net cost is £4,800 minus £2,016 plus £640, or £3,424, about 29% less. The same sums with different P11D values and rentals are quick to run in the company car tax calculator.
These examples ignore employer National Insurance, pension effects and any charge-point installation. They show the mechanism, not a quote.
BIK percentages for electric cars rise during a typical lease, so the tax cost grows even though the rental is fixed. Using the same £40,000 P11D value, a higher rate taxpayer pays 40% of the taxable benefit each year. The figures below follow HMRC's published percentages and assume a three year agreement starting in 2026/27.
Over the three years the BIK tax is £640, £800 and £1,120. That total of £2,560 compares with income tax and NI savings on the sacrificed pay, which stay at the same rate while the rental is fixed. A longer agreement into 2028/29 and 2029/30 would see the tax charge climb to £1,120 and then £1,440 a year, so the net saving narrows each year.
| Tax year | BIK percentage | Taxable benefit on £40,000 | Tax at 40% | Tax at 20% |
|---|---|---|---|---|
| 2026/27 | 4% | £1,600 | £640 | £320 |
| 2027/28 | 5% | £2,000 | £800 | £400 |
| 2028/29 | 7% | £2,800 | £1,120 | £560 |
| 2029/30 | 9% | £3,600 | £1,440 | £720 |
What happens if you leave, are made redundant or take parental leave
The lease is usually a contract between your employer and the provider, with an agreement between you and your employer. If you leave, most schemes end the car arrangement and the car goes back, though terms on early termination charges vary and may fall on you. Read the clause on who pays if the lease ends before the agreed term.
Redundancy is the situation to check most carefully. Some schemes include cover for early termination costs on redundancy, others do not, and the length of the term affects the exposure.
Parental leave and other unpaid or reduced-pay periods are a separate pressure point. If your pay falls, the sacrifice still has to be funded. Statutory payments such as maternity pay are based on earnings, so a lower gross salary can reduce them. Many employers allow the car to be kept with a pause or suspension arrangement, but this is not universal, so ask for the policy in writing before you commit.
Side effects of a lower salary and questions to ask
Because your contractual salary is reduced, anything calculated from it can fall. Pension contributions based on gross pay may shrink, some employers offer to protect this and others do not. Lenders may assess a mortgage on your reduced salary, and death-in-service cover is often a multiple of pay.
Your salary must also stay above the National Minimum Wage after the sacrifice, which can limit access for lower earners.
Salary sacrifice schemes are set by the employer, usually through a specialist provider, so the small print differs more than the tax maths does. A short list of questions before you sign will tell you most of what you need to know.
The answers should be in writing, either in the scheme guide or the employee agreement. If a point is not covered, treat that as a gap rather than assuming it works in your favour.
- Ask whether pension contributions are calculated on pre-sacrifice pay.
- Ask how mortgage lenders treat the car, as some adjust for it.
- Ask what happens to statutory pay and life cover.
- What is included in the sacrifice: rental only, or also insurance, servicing, tyres, breakdown cover and the charging cable?
- What are the early termination charges if you leave, are made redundant or want to hand the car back?
- Is there any protection if you are on long-term sickness absence or unpaid leave?
- Are pension contributions and life cover based on pay before or after the sacrifice?
- How is mileage handled, and what are the excess mileage charges at the end of the term?
- Who is responsible for fair wear and tear, and is there any damage cover through the scheme?
- Can you cancel before delivery if the car is delayed or your circumstances change?
Who it suits and why employers offer schemes
Schemes tend to suit employees who want an electric car, can charge at home, and expect to stay with their employer for the whole term. Higher rate taxpayers see the biggest percentage saving. Those with uncertain job tenure, or a pay situation that may change soon, should weigh the exit costs more heavily.
If you are comparing against a private contract hire or a purchase, see lease vs PCP vs HP vs buying for the wider cost picture.
Employers pay Class 1A National Insurance on the taxable value of a company car, and Class 1 employer National Insurance on salary. When pay is sacrificed, the employer pays less Class 1 NI on the reduced salary, and Class 1A on the low BIK value of an electric car. For electric cars this can leave the employer slightly better off, which is a large reason such schemes are offered at all.
Some employers pass part of that saving to staff, others keep it to cover the scheme's running costs. It is worth asking, but do not assume a saving exists, because employer NI rates and thresholds change and HMRC's published rates are the source to check.
The practical point for you is that the scheme is a business decision for your employer. They can change or close it for new joiners, and a car already on order is governed by the contract you signed.