Car salary sacrifice explained: how it works, what it saves and who it suits

What salary sacrifice is

A salary sacrifice arrangement is an agreed change to an employee's contract. The employee gives up an amount of gross salary and, in return, the employer provides a benefit, in this case a car. The car is typically provided through a specialist scheme provider and the package often includes insurance, maintenance and breakdown cover.

Because the employee's cash salary is lower, income tax and employee National Insurance are calculated on the reduced figure. The employee then pays tax on the car as a benefit in kind instead.

Where the savings come from

The saving is the difference between the tax and National Insurance the employee no longer pays on the sacrificed salary, and the benefit-in-kind tax they now pay on the car. The employer also saves employer National Insurance on the sacrificed amount, though employer Class 1A National Insurance is normally due on the benefit in kind.

For electric cars, the benefit-in-kind charge is low, so the gap between the two figures can be large. For petrol and diesel cars it usually is not, which is why almost all car salary sacrifice schemes now focus on electric vehicles. The actual saving depends on the employee's tax band, the car and the package price, so any figure quoted by a provider should be treated as an illustration.

Optional remuneration arrangements and the 75g/km rule

Since April 2017, benefits provided through salary sacrifice have generally fallen under the optional remuneration arrangement rules, often shortened to OpRA. Under those rules, the employee is taxed on the higher of the salary given up and the normal benefit-in-kind value. That removes most of the tax advantage for many benefits.

Cars with CO2 emissions of 75g/km or less are excluded from that higher-of rule and are taxed on the normal benefit-in-kind value only. Fully electric cars, at 0g/km, fall within this exclusion, which is why electric car salary sacrifice remains tax efficient. Transitional protection for arrangements made before April 2017 ended in April 2021.

HMRC explains the rules in its guidance on salary sacrifice and the effects on PAYE at gov.uk/guidance/salary-sacrifice-and-the-effects-on-paye.

Benefit-in-kind rates explained

The taxable value of a company car is its list price multiplied by an appropriate percentage, which depends on its CO2 emissions and, for low-emission cars, its electric range. The employee pays income tax on that value at their marginal rate.

For zero-emission cars, the published percentages rise gradually from 3% in 2025 to 2026 to 9% in 2029 to 2030, as shown in the table below. Rates for 2028 to 2029 and 2029 to 2030 were announced at the Autumn Budget 2024.

Cars emitting between 1 and 50g/km, mainly plug-in hybrids, are banded by electric range until 2027 to 2028. From 2028 to 2029 they move to a single rate of 18%, rising to 19% in 2029 to 2030. The highest appropriate percentage is 37% up to 2027 to 2028, then 38% and 39% in the following two years.

At the Autumn Budget 2025, the government also announced a temporary easement for some plug-in hybrids first registered from 1 January 2025 under the new emissions standard. HMRC's policy paper on the plug-in hybrid benefit-in-kind easement explains which cars qualify and for how long.

Company car tax (BiK) rates for electric cars

Source: HMRC Employment Income Manual EIM24705 and HM Treasury and HMRC policy papers on company car appropriate percentages for 2025 to 2028 and 2028 to 2030, published on gov.uk. Rates for later years can change at future Budgets; check gov.uk before relying on them.

Who it tends to suit, and who it may not

Salary sacrifice tends to work best for employees on stable contracts who expect to stay with their employer for the length of the agreement, often two to four years, and who pay income tax at a rate that makes the saving meaningful.

It is less suitable where the reduction in pay would take someone below the National Minimum Wage, where a lower contractual salary might affect earnings-related benefits such as statutory maternity pay, or where mortgage lenders and pension contributions are calculated on the reduced figure. Employees should also understand what happens if they leave, go on long-term sick leave or start a family, since early termination arrangements vary between schemes.

• May suit: settled employees, basic and higher rate taxpayers, people who want a new EV with most costs bundled
• May not suit: those near the minimum wage, short-tenure staff, people whose benefits or borrowing depend on contractual pay

The employer's side

Employers need to vary employment contracts properly, run the deductions through payroll and report the benefit to HMRC. Salary sacrifice must never reduce an employee's cash pay below the National Minimum Wage or National Living Wage, so employers need controls to cap or refuse arrangements that would breach it.

Employers should also consider how the scheme handles leavers and changes in circumstances, such as maternity leave or long-term absence. HMRC guidance says that salary sacrifice arrangements cannot normally be switched on and off at will, but can be changed in response to life events such as marriage, divorce or pregnancy.

In the Autumn Budget 2025, the government left car salary sacrifice rules unchanged. Its separate change to pension salary sacrifice, capping National Insurance relief at £2,000 per employee per year from April 2029, applies only to pension contributions.

What a scheme package usually includes

Most car salary sacrifice packages are designed to be close to all-inclusive, so the employee has a single deduction from gross pay. Typical inclusions are listed below; check each scheme's documents for the exact terms.

• The car itself, usually new and electric
• Fully comprehensive insurance
• Servicing, maintenance and tyres
• Breakdown and recovery cover
• Vehicle tax
• Some form of early termination protection, often limited to specific events

Subscription, salary sacrifice or personal lease?

These three routes can look similar but differ in commitment and tax. A personal lease is paid from net pay, typically runs two to four years and carries no tax saving. A car subscription is also paid from net pay but offers much shorter commitment, at a higher monthly cost. Salary sacrifice is paid from gross pay, offers a tax saving on qualifying low-emission cars and depends on your employer offering a scheme.

If your employer offers salary sacrifice and you expect to stay, it is likely to be worth investigating. If you need flexibility, or your employer does not offer a scheme, a subscription or lease may be the practical alternative. This page is general information, not tax advice; check gov.uk or speak to a qualified adviser about your circumstances.