Salary Sacrifice: How does it work?

What is salary sacrifice?

Salary sacrifice is when you agree to give up part of your gross salary (before tax and National Insurance) in exchange for non-cash benefits.

Non-cash benefits via salary sacrifice could include:

• Pension contributions
• Childcare vouchers
• Cycle-to-work schemes
• Electric car leases

It’s a tax-savvy swap: you earn slightly less on paper, but gain access to valuable perks - and pay less tax and NI as a result. To take advantage, your employer has to have a salary sacrifice scheme in place.

What are the pros and cons?

Now you know the answer to “what is a salary sacrifice scheme”, let’s explore the pros and cons of salary sacrifice

Advantages of Salary Sacrifice

• Lower National Insurance contributions: you pay less NI, and your employer also saves (around 13.8%), sometimes reinvesting this into your pension.
• Tax-efficient perks: access benefits tax-efficiently, reducing taxable income.
• Lower taxes on salary: especially if reducing salary keeps you in a lower tax bracket.
• Employer support: your employer handles admin, suppliers, and legalities.

Disadvantages of Salary Sacrifice

• Affects borrowing power: a lower gross income could reduce mortgage eligibility.
• Reduced take-home pay commitment: you must budget for continued costs, including top-ups.
• Eligibility requirements: typically require minimum service, age, and licence points.
• Limited control: you don’t own the benefit; leaving employment means losing access.

A salary sacrifice car scheme typically runs for 2 - 4 years with providers like Arval, Lex Autolease or Octopus EV, and tends to focus on electric vehicles - petrol/diesel uptake is now minimal.

Cars are expensive, so the contribution you sacrifice from your gross salary won't cover its total cost, meaning you'd still have to make a contribution to it from your take-home pay but it could be a lot cheaper than providing it yourself.

How Does Salary Sacrifice Work for Cars?

Here’s how salary sacrifice works: the car is leased by your employer from a leasing company for, typically, three or four years. You never own it; it must be handed back at the end of the term. There's no deposit to pay while maintenance, tyres, the road fund licence and even insurance for you and a named driver are included in the monthly payment. All you have to add is fuel.

To sum up, here’s what the salary sacrifice process looks like:

• Choose your car: pick an EV from the offered range.
• Get employer approval: employer confirms affordability, eligibility.
• Salary adjusted: gross pay is reduced before tax and NI.
• Car is delivered: with insurance, maintenance, tyres, and road tax all included.
• Enjoy the car: you just pay for electricity or fuel.

Salary Sacrifice Eligibility Checklist 

How does car salary sacrifice work when it comes to eligibility? Here are some requirements you need to fulfill to get an EV via salary sacrifice:

• Aged 21+
• Company service of at least 6 months
• Valid driving licence (≤ 6 points)
• Gross salary remains above minimum wage (post sacrifice)

How much could I save?

Wondering what your salary sacrifice EV savings could be? Here’s a quick salary sacrifice example calculation to show how much you could save:

Car Lease: £600 / month
Higher-rate taxpayer (40%) → Pays just £360 / month from take-home
Basic-rate taxpayer (20%) → Pays around £480 / month

This really shows how much salary sacrifice tax benefits can stretch. That’s before factoring in how much you save on running costs (EVs are cheaper to fuel, maintain, and tax). Plus, EVs benefit from low Benefit-in-Kind (BIK) tax.

Why EVs Are Best for Salary Sacrifice

EV salary sacrifice tax is the lowest of all cars. To reflect their zero 'tailpipe' emissions and to encourage their adoption, EVs attract low BIK EV rates of just 2%. This will rise to 3% from the 2025/26 tax year and then to 5% by 27/28. These figures compare with, for example, a BIK rate of 29% (rising to 30% from tax year 2025/26) for a Ford Focus 1.0T Ecoboost with CO2 emissions of 124g/km.

Here’s a CO2 emissions table so you can see how high the BIK percentage can go for petrol cars compared to EVs:

So, when it comes to EV BIK tax vs petrol BIK tax, there’s a clear winner here!

How Popular Is Salary Sacrifice in the UK?

Here are some stats:

• Around 1 in 3 employers offer salary sacrifice
• EV salary sacrifice take-up at some schemes is 10%+
• Providers like Arval manage around 5,000 cars, 88% of them being EVs

So it’s no surprise that more leasing providers are entering the market as the schemes become more popular.

Things to Consider Before You Sign Up

Here’s a quick salary sacrifice checklist of what to ask yourself before making the plunge

• Can I comfortably afford the monthly cost from my take-home pay?
• Do I have access to a charger - at home, work, or nearby?
• Am I planning to stay in this job for the next 2 - 4 years?

Also, remember: no credit check is needed for employer salary sacrifice schemes - great news if you're building your credit, but also a reason to budget carefully. Salary sacrifice is easy to enter, but not as easy to exit.

What should an employee consider before leasing an EV on salary sacrifice?

Can you afford the payments? This is an obvious but important question. Remarkably, no credit checks are required to take a car on salary sacrifice meaning, for the sake of a shiny new EV, it would be easy to ignore your other financial commitments and get into debt. In addition, no deposit is required, which can be an encouragement to take on more debt than you might be able to repay.

Other things to consider include how you will charge your new EV. Home charging on a driveway is the easiest solution but if you live in a flat, you'll be reliant on the public charging network. If you leave your employer, you'll lose the car. How would you replace it?

FAQs

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

You give up a chunk of your gross salary in exchange for benefits like pensions, bikes or an electric car. It lowers your taxable income, so you save on tax and NI.

Is salary sacrifice worth it in the UK?

Yes, at least when used to lease an electric car and, of course, for those who can afford to make the required monthly lease contributions from their take-home pay. For cars with higher BIK rates – hybrids and especially pure petrol and diesel cars – it makes no sense, which is why their take up on salary sacrifice schemes is almost zero. Generally, it works well for high earners in long-term employment who have EV charging access. It doesn’t work so well for part-time, short-term workers.

What can be included in a salary sacrifice scheme?

Usually: insurance, road tax, servicing, MOTs, breakdown cover, tyres - all sorted. You just pay for the electricity or fuel.

Do you need a credit check for salary sacrifice?

No - just eligibility checks. But you still need to manage repayments wisely.

Can I get an electric car through salary sacrifice?

Yes - most schemes now centre their offerings on EVs for their low emission tax benefits.

How much can I save with salary sacrifice?

This depends on the lease and the tax bracket you’re in. On average, people save between 20-50%.

Are petrol or diesel cars available on salary sacrifice?

Yes, but they’re not as common as EVs, as high BIK rates makes them a lot less attractive.

What is the difference between salary sacrifice and a company car?

With salary sacrifice, you effectively 'pay' yourself via pre-tax income. A standard company car is fully employer-funded.

Can salary sacrifice reduce my National Insurance contributions?

Yes - both yours and your employer’s. Some employers even reinvest that saving into your pension.

Final Thoughts: Is Salary Sacrifice Right for You?

So, is a salary sacrifice scheme worth it? For the right person – a responsible borrower who has budgeted to lease a car from their take-home salary – having an electric car on salary sacrifice makes a lot of sense. It's often the best way to lease an EV in the UK, as it’s cheaper than leasing one yourself and the charge includes everything but the electricity to charge it. Of course, buying and running a used EV is cheaper still but that's another debate…