How does a salary sacrifice electric car scheme reduce my tax?

Full answer

Salary sacrifice electric car schemes have grown rapidly because the combination of very low electric car BIK rates and standard salary sacrifice tax savings makes them one of the most tax-efficient ways to get a new car in the UK. **How the sacrifice works** You agree to give up a fixed amount of gross salary each month (before Income Tax and National Insurance are calculated) in exchange for your employer providing a fully maintained electric car lease, typically including insurance, servicing, tyres and breakdown cover bundled into the monthly cost. **Why this saves money compared with paying privately** If you paid for the same car lease privately out of your net (after-tax) salary, you would need to earn considerably more gross salary to cover the cost, since you would pay Income Tax and employee National Insurance on that money first. Under salary sacrifice, the sacrificed amount is deducted BEFORE tax and National Insurance, so you effectively pay for the car out of gross, untaxed income -- you only pay the (usually low) company car BIK tax on the electric car itself, rather than full Income Tax and NI on the whole lease cost. **Worked example** A basic-rate taxpayer sacrifices £400 a month of gross salary for an electric car lease. Paying this from gross salary before 20% Income Tax and 8% National Insurance would otherwise have cost them roughly £560-£600 of gross salary to net the same £400 after deductions, if paid privately from take-home pay. Instead, under salary sacrifice, they give up exactly £400 of gross salary and separately pay company car BIK tax on the car (perhaps £30-£60 a month for a modestly priced EV), meaning the electric car costs them significantly less overall than an equivalent private lease funded from taxed income. **Effect on other things linked to salary** Because salary sacrifice reduces your official gross salary, it can also reduce things calculated from that figure, including mortgage affordability assessments, some means-tested benefit or childcare eligibility tests, and pension contributions if these are also a percentage of salary -- this is worth checking before committing to a large sacrifice amount, especially close to a mortgage application or the £100,000 income threshold used for childcare and Personal Allowance taper purposes. **Minimum wage floor** Your employer must ensure the sacrifice does not take your pay below the National Minimum Wage or National Living Wage rate for your age, which can limit how much lower earners can sacrifice into these schemes compared with higher earners. **Employer National Insurance savings too** Employers also save on Class 1 employer National Insurance (15% from April 2025) on the sacrificed salary amount, which is part of why many employers are keen to offer and even part-subsidise these schemes, since it reduces their own National Insurance bill as well as offering a valued employee benefit. **Practical tip** Compare the total net cost of a salary sacrifice EV scheme (sacrificed salary plus BIK tax, minus any tax/NI saved) against a personal lease or purchase using an online calculator before committing, since the exact saving depends on your tax rate, the specific car's BIK percentage, and your pension and student loan position.

Try the calculator

More answers

• How do company car tax (BIK) percentage bands work for different CO2 and electric range?