Salary Sacrifice Explained

Salary Sacrifice Explained

A smarter way to offer electric vehicles to your workforce

What is Salary Sacrifice?

Salary sacrifice is a long-established, HMRC-approved arrangement that allows employees to exchange part of their gross salary for a non-cash benefit. It is widely used across benefits such as healthcare, childcare and cycle-to-work schemes, and has proven to be an effective tool for employee retention while delivering meaningful tax efficiencies.

When applied to cars, salary sacrifice is predominantly focused on electric vehicles, enabling employees to access a brand-new EV using their employer’s purchasing power, under a highly tax-efficient structure. As with any vehicle decision, suitability should be considered, including charging infrastructure, driving range, and day-to-day usage requirements.

How does it work?

The process is simple:

1. The employee selects the electric vehicle they want.

2. Rather than arranging a personal lease or purchase, the employer leases the vehicle, in the same way as a traditional company car.

3. A fixed amount is deducted from the employee’s gross salary each month to cover the lease and associated costs.

   
   

Because the deduction is taken before Income Tax and National Insurance Contributions (NICs) are applied, the employee makes significant tax savings.

The benefits extend beyond the employee. As gross salary is reduced, the employer also benefits from lower Employer National Insurance costs, creating a financially efficient benefit for both parties.

Are there limitations?

Salary sacrifice is one of the most tax-efficient ways for employers to offer electric vehicles, and limitations are minimal.

• Schemes can be extended to most employees, subject to eligibility criteria

• Employee tax and NIC savings can be passed on, shared, or retained by the employer, allowing flexible and commercial scheme design

  
  

As the vehicle is a non-cash benefit, Benefit-in-Kind (BiK) tax applies. For electric vehicles, this is currently extremely favourable at just 3% of the P11D value until April 2026, making EV salary sacrifice far more attractive than petrol or diesel alternatives.

A key compliance requirement is that salary sacrifice must not reduce an employee’s pay below the National Minimum or Living Wage. A review should always be conducted before entering into the agreement.

Salary sacrifice is not well suited to petrol or diesel vehicles due to high BiK rates, but it is ideal for organisations seeking to reduce CO₂ emissions, improve ESG performance, and gain greater control over grey-fleet driving.

What are the risks?

As the vehicle is leased by the employer, the employer retains responsibility for the car if an employee leaves during the agreement.

There are several effective ways to manage this risk:

• Employment contract addendums requiring employees to contribute to early termination costs

• Retention of Employer NI savings to create a contingency fund

• A combination of both approaches

  
  

While early termination insurance products are available, they can be costly. Many employers prefer contractual and financial mitigations built into the scheme.

Who is eligible?

Eligibility is determined by the employer, but as a minimum, participants must:

• Be a UK resident

• Hold a full UK driving licence and be aged 18 or over

• Have completed probation

• Have at least 6 months’ service

• Be paid via PAYE

• Remain above the National Living Wage after sacrifice

• Intend to remain employed for the duration of the agreement

• Not be planning to retire during the term

What’s included?

Beyond tax savings, salary sacrifice EVs offer a comprehensive package:

• A brand-new electric vehicle for 2, 3 or 4 years

• Servicing and maintenance included

• Unlimited tyre replacement (fair wear and tear)

• Fully comprehensive insurance with up to two named additional drivers

• Roadside and at-home breakdown assistance

• MOTs and Road Fund Licence

• Reduced grey-fleet risk and improved compliance

• Greater control over vehicle age, safety, and presentation

Taxation, directors and key considerations

Salary sacrifice vehicles are treated as company cars for tax purposes. As a result, Approved Mileage Allowance Payments (AMAP) do not apply. Instead, business mileage is reimbursed at HMRC Advisory Electricity Rates:

• 7p per mile for EVs charged at home

• 14p per mile for EVs charged at public chargers

  
  

Historically, salary sacrifice was less attractive for directors who relied heavily on dividends. However, with dividend tax rates now at 8.75% (basic) and 33.75% (higher), and increasing focus on pension contributions and corporation tax efficiency, a blended approach of salary and dividends is becoming more common.

When combined with salary sacrifice, this can form part of a broader, highly tax-efficient remuneration strategy. The optimal structure varies by business and should always be discussed with professional advisers.

Employer National Insurance savings explained

Employer NIC savings arise from the reduction in gross salary.

For example:

• Salary sacrifice: £750 per month (£9,000 per year)

• Employer NIC rate: 13.8%

  
  

Employer NIC saving:

£9,000 × 13.8% = £1,242 per year

The employer also pays Class 1A NIC on the BiK value of the vehicle.

For example:

• Vehicle P11D value: £50,000

• EV BiK rate: 2%

• BiK value: £1,000

• Class 1A NIC: £138 per year

Net employer saving:

£1,242 – £138 = £1,104 per year

Employers can choose whether to retain this saving, pass it to employees, or share it.

Let’s crunch the numbers (employee examples)

Based on a 40-year-old, 40% taxpayer in Oxfordshire, 15,000 miles per year, 3-year term:

BYD Seal Design AWD

• Gross sacrifice: £758

• Net sacrifice: £523

• Comparable private lease: £821

• Potential saving: £298 per month

  
  

Mercedes-Benz EQB AMG Line Premium

• Gross sacrifice: £886

• Net sacrifice: £620

• Comparable private lease: £962

• Potential saving: £342 per month

  
  

MG4 Long Range

• Gross sacrifice: £563

• Net sacrifice: £381

• Comparable private lease: £611

• Potential saving: £230 per month

  
  

Conclusion

Salary sacrifice is a powerful tool for attracting and retaining talent, delivering significant tax savings for employees while generating meaningful Employer NIC savings.

Employers should carefully consider their approach to early termination risk, using a combination of retained savings, contractual protection, and specialist products where appropriate.

We work with Jackson Lee to offer early termination insurance and provide a Lifestyle Protection product through Lex Autolease, designed to cover events such as maternity, long-term sickness, loss of licence, reduced hours, and career breaks, all within the salary sacrifice framework.

Contact us today to explore how salary sacrifice electric vehicles could benefit your business.

If you want tailored advice, email leasing@automotivate.co.uk or call 01865 20 30 40. If you are comparing pricing right now, view our latest leasing offers.