A salary sacrifice car scheme allows you to exchange part of your contractual gross salary for a new leased company car. Because the deduction comes from your gross pay before Income Tax and National Insurance are calculated, your taxable earnings decrease. In exchange, you pay Benefit-in-Kind (BIK) company car tax.
For drivers choosing electric cars, tax relief exceeds BIK liability, creating savings compared to private leasing. You can model your take-home pay impact using the salary sacrifice car calculator.
How salary sacrifice car schemes work
Under a salary sacrifice arrangement, your employer leases the vehicle. The monthly fee is deducted directly from your gross pay via PAYE payroll.
These corporate packages typically cover all motoring costs except road fuel or electricity:
- New vehicle lease
- Full motor insurance
- Routine servicing and MOT testing
- Replacement tyres and wear parts
- 24-hour breakdown assistance
- Annual Vehicle Excise Duty (road tax)
Because payments come from gross salary, savings reflect your marginal rates of Income Tax and National Insurance.
Benefit-in-Kind (BIK) rates for electric vehicles
When an employer provides a company car for personal use, HMRC treats it as a taxable benefit. The BIK charge is calculated by multiplying the official vehicle list price including options and VAT (the P11D value) by a percentage based on carbon dioxide emissions.
The UK government maintains lower BIK rates for pure electric vehicles (EVs):
| Tax Year | Pure Electric Vehicle (0g/km CO2) BIK Rate |
|---|---|
| 2024/25 | 2% |
| 2025/26 | 3% |
| 2026/27 | 4% |
| 2027/28 | 5% |
For the 2026/27 tax year, the BIK rate on pure electric vehicles is 4%. While this is an increase of one percentage point from 2025/26, it remains low compared to petrol and diesel rates that reach up to 37%.
Electric versus petrol: why petrol cars do not save money
Salary sacrifice is tax-efficient for electric vehicles, but provides no financial advantage for petrol or diesel models.
Under Optional Remuneration Arrangements (OpRA) rules, any car emitting over 50g/km of CO2 is taxed on whichever figure is higher:
- The gross salary sacrificed, or
- The standard cash equivalent BIK value.
Because petrol and diesel cars carry BIK rates between 25% and 37%, the annual BIK liability is substantial. For example, a £40,000 petrol car with a 33% BIK rate produces a taxable benefit of £13,200 per year. Taxing that £13,200 benefit cancels out any tax relief from the salary reduction.
Vehicles emitting 50g/km or less, including pure electric vehicles, are exempt from OpRA rules. On an EV, tax applies strictly to the 4% BIK value, preserving the gross salary tax deduction.
Tax savings examples across salary bands in 2026/27
In 2026/27, the personal allowance is £12,570, the 20% basic rate extends to £50,270, the 40% higher rate applies up to £125,140, and the 45% additional rate applies above £125,140. Employee National Insurance is 8% between £12,570 and £50,270, and 2% above £50,270.
Consider a pure electric vehicle with a P11D value of £40,000, leased for £600 gross per month (£7,200 per year). The annual BIK taxable value is 4% of £40,000, which equals £1,600 per year, or £133.33 per month.
Basic rate taxpayer (£35,000 salary)
- Gross monthly sacrifice: £600.00
- Tax relief: 20% Income Tax + 8% National Insurance = 28% (£168.00 saved per month)
- Monthly BIK tax: 20% of £133.33 = £26.67 per month
- Net reduction in take-home pay: £600.00 - £168.00 + £26.67 = £458.67 per month
- Annual net cost: £5,504, saving £1,696 per year compared to gross lease cost.
Higher rate taxpayer (£65,000 salary)
- Gross monthly sacrifice: £600.00
- Tax relief: 40% Income Tax + 2% National Insurance = 42% (£252.00 saved per month)
- Monthly BIK tax: 40% of £133.33 = £53.33 per month
- Net reduction in take-home pay: £600.00 - £252.00 + £53.33 = £401.33 per month
- Annual net cost: £4,816, saving £2,384 per year.
Personal allowance taper (£110,000 salary)
Between £100,000 and £125,140, you lose £1 of personal allowance for every £2 earned, producing an effective 60% income tax rate plus 2% National Insurance:
- Gross monthly sacrifice: £600.00
- Tax relief: 60% Income Tax + 2% National Insurance = 62% (£372.00 saved per month)
- Monthly BIK tax: 40% of £133.33 = £53.33 per month
- Net reduction in take-home pay: £600.00 - £372.00 + £53.33 = £281.33 per month
- Annual net cost: £3,376, saving £3,824 per year.
Additional rate taxpayer (£135,000 salary)
- Gross monthly sacrifice: £600.00
- Tax relief: 45% Income Tax + 2% National Insurance = 47% (£282.00 saved per month)
- Monthly BIK tax: 45% of £133.33 = £60.00 per month
- Net reduction in take-home pay: £600.00 - £282.00 + £60.00 = £378.00 per month
- Annual net cost: £4,536, saving £2,664 per year.
Summary of net monthly costs
The table below contrasts the actual cost of a £600 gross EV package:
| Salary Tier | Gross Deduction | Tax and NI Saved | Monthly BIK Tax | Net Monthly Cost | Annual Total Cost |
|---|---|---|---|---|---|
| Basic Rate (£35,000) | £600 | £168 | £26.67 | £458.67 | £5,504 |
| Higher Rate (£65,000) | £600 | £252 | £53.33 | £401.33 | £4,816 |
| Taper Band (£110,000) | £600 | £372 | £53.33 | £281.33 | £3,376 |
| Additional Rate (£135,000) | £600 | £282 | £60.00 | £378.00 | £4,536 |
Frequently asked questions
Does a salary sacrifice car scheme affect your pension?
If your employer calculates pension contributions on actual post-sacrifice earnings, pension contributions may decline. However, many employers use a notional reference salary to maintain pension entitlements at pre-sacrifice levels. Check your workplace pension terms before joining.
What happens if you leave your employer during the agreement?
If you resign or face redundancy, you must return the vehicle. Employers often purchase early termination insurance, but some contracts pass charges to the employee if departure is voluntary.
Why do petrol and diesel cars not save money under salary sacrifice?
Under HM Revenue and Customs OpRA rules, cars with carbon emissions over 50g/km are taxed on the higher of the sacrificed salary or the cash equivalent BIK value. Because petrol cars have BIK rates up to 37%, the resulting tax cancels out any Income Tax and National Insurance savings.
Does a car salary sacrifice scheme reduce student loan deductions?
Yes. Student loan repayments for Plan 1, Plan 2, Plan 4, and Plan 5 are calculated on earnings subject to Class 1 National Insurance. Because salary sacrifice lowers gross pay before National Insurance is assessed, monthly student loan deductions fall by 9% of the sacrificed amount above the statutory threshold.