If you are looking for a highly effective way to reward your employees, reduce your company’s carbon footprint, and save on tax all at the same time, you need to look at Salary Sacrifice schemes—specifically for Electric Vehicles (EVs).
Over the last few years, EV salary sacrifice schemes have exploded in popularity across the UK. But how exactly do they work, and what are the actual financial benefits for both the business and the staff?
Let’s break down the mechanics, the tax savings, and the things you need to watch out for.
What is a Salary Sacrifice Scheme?
A salary sacrifice arrangement is an agreement between an employer and an employee to change the employee's contract of employment.
The employee agrees to give up a portion of their pre-tax salary. In return, the employer provides them with a non-cash benefit of a similar value. Common examples include increased pension contributions, cycle-to-work schemes, and childcare vouchers.
However, the undisputed star of the show right now is the Electric Vehicle (EV) scheme.
Why Electric Vehicles? The Benefit-in-Kind (BiK) Advantage
When an employer provides a car for an employee's private use, HMRC considers this a "Benefit in Kind" (BiK), and it is subject to company car tax.
For petrol and diesel cars, this BiK rate can be up to 37% of the car’s list price, which often wipes out any tax savings from the salary sacrifice. But for fully electric vehicles, the government has heavily incentivised adoption by keeping the BiK rates incredibly low.
Current EV BiK Rates: For the 2025/26 tax year, the BiK rate for a fully electric car is just 3%, rising to 4% for 2026/27, and 5% for 2027/28.
Because the BiK tax is so low compared to the income tax and National Insurance (NI) saved on the sacrificed salary, the EV scheme becomes highly lucrative.
How it Benefits the Employee
For an employee, getting an EV through a salary sacrifice scheme is often significantly cheaper than leasing the same car privately.
Income Tax and NI Savings: Because the lease cost is deducted from their gross pay (before tax), the employee saves Income Tax and National Insurance on that amount.
All-Inclusive Packages: Most EV salary sacrifice schemes are structured as "worry-free" packages. The monthly deduction typically covers the lease, fully comprehensive insurance, routine servicing, maintenance, tyre replacement, and breakdown cover.
No Upfront Deposit: Unlike personal leases, which often require thousands of pounds upfront, salary sacrifice schemes usually require £0 deposit.
A Quick Example:
Let’s say an employee earning £50,000 wants to lease an EV that costs £500 a month.
By sacrificing £500 of their gross salary, a basic/higher rate taxpayer will save hundreds of pounds in tax and NI every month. After paying the small 3% or 4% BiK tax, their actual reduction in take-home pay might only be around £300 to £350, rather than the full £500 it would cost them privately.
How it Benefits the Employer
It isn't just the employees who get a good deal; companies have a lot to gain by setting these schemes up.
Employer NI Savings: Employers pay Class 1 National Insurance on their employees' salaries. By reducing the gross salary, the employer's NI bill decreases. Even after paying Class 1A NI on the small BiK value of the car, the business generally makes a net saving.
Talent Attraction and Retention: In a competitive job market, offering a brand-new, fully maintained electric car is a massive perk that helps attract top-tier talent and keep current staff happy.
Boosting ESG Credentials: Encouraging the switch to electric vehicles actively lowers the company's indirect carbon footprint, contributing positively to Environmental, Social, and Governance (ESG) targets.
The Fine Print: Things to Consider
While salary sacrifice EV schemes are fantastic, we always advise clients to be aware of the wider implications before signing the dotted line.
Mortgage Applications: Because the scheme legally reduces an employee's gross salary, it can lower the maximum amount they are able to borrow for a mortgage.
Statutory Benefits: A salary sacrifice cannot drop an employee's wage below the National Minimum Wage. Additionally, lowering gross pay could affect statutory benefits like Maternity Pay or Life Cover (if the payout is a multiple of their salary).
Pension Contributions: Unless the employer specifically agrees to maintain pension contributions based on the original higher salary (a "notional" salary), pension contributions from both parties will decrease.
Leaving the Company: If an employee resigns or is let go, breaking the lease early can incur hefty termination fees. Employers should look for lease providers that offer "early termination protection" to mitigate this risk.
The Bottom Line
For UK businesses and their employees, an EV salary sacrifice scheme is currently one of the most tax-efficient benefits available. It puts staff in brand-new, eco-friendly cars for a fraction of the retail price while saving the business money on National Insurance.