How Does Electric Car Salary Sacrifice Work?
In simple terms, salary sacrifice means giving up part of your gross salary in exchange for a benefit—such as a car.
Because your salary is reduced before tax, you can pay less:
- Income Tax
- National Insurance
When used for cars — especially electric cars — this can significantly reduce the real cost of driving.
For a full overview and examples, see our main guide.
How Salary Sacrifice Works
Here’s how a typical car salary sacrifice scheme works:
- You choose a car through your employer
- Your gross salary is reduced (e.g. £400–£600/month)
- You save tax and National Insurance on that amount
- You pay Benefit-in-Kind (BIK) tax on the car
- The result is often a lower net cost
Want to see your own savings? Use our Salary Sacrifice Calculator.
Why Salary Sacrifice Works For Cars
Salary sacrifice works particularly well for cars because:
- Employers can access corporate lease rates
- Costs are bundled (insurance, maintenance, etc.)
- Tax savings reduce the effective cost
This makes it easier and often cheaper than arranging everything privately.
Why Electric Cars Are So Popular
Get an EV or electric company car and your taxable benefit will be tiny for the tax years up to 2029-30.
The taxable benefit starts at 4% for the electric car in the current tax year 2026/27 and increases to 9% in 2029/30.
With these advantages the electric company car has definitely come of age in the employee perk market.
But whilst this advantage applies where an employee already has an entitlement to a company car, not everyone gets this much prized perk.
So what about those for whom a company car is a far-away dream?
Well, this is where an EV or Electric Car Salary Sacrifice plan comes into play.
What Does Electric Car Salary Sacrifice Do?
Salary Sacrifice allows an employee to trade part of their pay for a perk.
It could simply be a sacrifice of salary (or a bonus or overtime) in return for enhancements to an existing perk (e.g. better medical insurance cover or higher pension contributions).
But an EV or Electric Car Salary Sacrifice plan can allow an employee to access an entirely new perk for which they would never normally qualify.
And that's where Salary Sacrifice and electric cars come together.
What The Employer Provides
We'll get into detailed calculations later, but the principle is straightforward.
Under a typical company car plan the employer provides an employee with a car, maintenance, breakdown recovery and insurance and the car is usually replaced on a fixed cycle according to age and mileage.
So an employee gets a brand new company car every X years and/or Y miles and during that period the car's running costs are covered by the employer (perhaps with free private fuel too).
In an EV or Electric Car Salary Sacrifice plan the principle is the same - the employer provides the car for a fixed period and mileage and settles the finance costs, etc, but the difference is that the employee then pays back the employer for the running costs.
The employee does this by giving up part of his/her gross (pre-tax) pay each week or month.
And because the salary adjustment is made to gross pay, this can reduce the employee's tax and NIC liabilities (and employer's NIC too).
How Do You Save From A Car Salary Sacrifice Plan?
This is where an EV or Electric Car Salary Sacrifice puts the 'cunning' into 'plan'.
Your employer contracts with a supplier for a company car, typically on business contract hire.
As a result the cost of the monthly vehicle rental is at corporate rates, usually lower than that of a personal finance contract.
A fixed price maintenance contract is also used, so the employee knows exactly how much servicing, maintenance and repairs ('SMR') will cost. Breakdown recovery is typically included too.
Finally, a company motor insurance plan (or 'fleet policy') provides insurance cover for the car.
The employer has now wrapped up a company car for the employee in a monthly cost bundle which should be cheaper for the employee than if they were to try to put together a similar bundle themselves.
Now all the employer has to do is allow employees to sacrifice some of their pay to get a car for a lot less per month than they would usually pay.
And The Icing On The Cake Is ...
Electric company cars are currently taxed on minimal values (currently only 4% of the list price, plus options and delivery), so the employee typically saves income tax and NIC in comparison to 'cash' pay.
And the same applies to the employer - there's currently only a very small employer's NIC liability on an electric company car.
As a result, both sides benefit from savings in an EV or Electric Car Salary Sacrifice plan in comparison to 'cash' pay.
For a fuller explanation of Income Tax, National Insurance and Benefit-in-Kind (BIK), see our salary sacrifice car tax guide.
How Do The Tax Savings Work?
Because you are switching to a company car, you are taxed on the Benefit-in-Kind (BIK) at company car rates rather than on your wages or salary.
Until 2029/30 the BIK tax rate for electric company cars is very low, starting at 4% of the car's list price in the current tax year 2026/27 and rising to 9% in 2029/30.
This means that instead of paying tax on the salary you give up, you pay tax on the BIK value of the car, which is much lower for an electric company car.
The Fly In The Ointment
In fact, there are two flies in the ointment.
The first is a set of tax rules relating to pay arrangements where an employee can choose between a perk or cash. These rules are known as 'OpRA'.
The second relates to complications in the rules for recovering VAT and getting business tax relief on car lease rentals.
We've explained more about each of these issues below.
OpRA
Having the option to choose between a perk and cash is caught by special tax rules known as 'Optional Remuneration Arrangements'.
To save space here we've explained OpRA in another help page, so if you want to read up then click on the link and we'll save your place here.
The key point for employees joining an EV or Electric Car Salary Sacrifice plan is that the current OpRA rules have a get-out clause for electric company cars.
Electric company car drivers using an EV or Electric Salary Sacrifice plan still benefit from low taxes until 2029/30.
As a result, an employee can join an EV or Electric Car Salary Sacrifice plan, get an electric company car and pay minimal tax until April 2030 and possibly beyond that due to current Government policy encouraging electric cars.
However (sorry, there had to be a 'however'), if the employee wants a hybrid car or one with an internal combustion engine the tax position under OpRA may not be as good.
OpRA tax problems can arise with cars where the car's CO2 output exceeds 50GP/Km - take a look at our explanation of OpRA to see more about this.
But this still leaves electric company cars and hybrids with lower CO2 outputs as an attractive benefit under a Salary Sacrifice plan.
VAT and Tax Relief
An employer can't normally recover all of the VAT incurred on contract hire rentals for company cars - usually only half the VAT paid on the rentals can be recouped by the business.
As a result, an employer will normally need to charge the employee for the 'lost' VAT, typically through a higher monthly/weekly adjustment to the employee's pay.
And there's a further complication if the employer provides a hybrid or ICE company car under a Salary Sacrifice plan instead of an electric car.
Not only do hybrids and ICE company cars carry higher tax liabilities for the employee, the employer can't always deduct the whole of the contract hire rentals from business profits taxes.
If the CO2 output of the car exceeds 50GP/Km then only 85% of the lease rental payments are tax deductible.
Now this won't affect electric cars (which have a zero CO2 output), but hybrids and ICE company cars with higher CO2 ratings could be hit.
As a result, all leased company cars with higher CO2 outputs will have higher total costs due to the tax disallowance to the employer.
But the VAT and tax factors can be included in the calculation for Car Salary Sacrifice so the employer isn't out of pocket for them.
Simple Salary Sacrifice Example
Suppose an employee gives up £500 of gross salary each month for an electric car.
- A 20% taxpayer could save around £100 in Income Tax (on the £500)
- Because the salary is reduced, employees typically save employee National Insurance
- They will pay BIK tax on the electric car
The final saving depends on the employee’s tax band, the car’s list price, the BIK percentage and the monthly salary sacrifice amount.
For a personalised estimate, use our Salary Sacrifice Calculator.
Show Me The Money ....
Despite the limitations we've just explained, providing electric or low CO2 company cars under a Salary Sacrifice plan still gives a cost and tax advantage over cash pay.
Salary Sacrifice can therefore be a highly attractive and cost/tax effective perk for an employee.
To help you work out whether you or your employer could benefit under a Salary Sacrifice plan, we've produced a free calculator to show the potential savings.
Just click on the button below to try it.
Salary Sacrifice FAQs
How does salary sacrifice work for an electric car?
An employee gives up part of their gross salary in exchange for an electric company car. Because the salary reduction is made before tax, the employee may save Income Tax and National Insurance, while paying Benefit-in-Kind tax on the car.
Why does salary sacrifice work well for electric cars?
Electric cars have low Benefit-in-Kind tax percentages compared with petrol and diesel cars, so the tax cost of the company car is usually much lower.
Do OpRA rules apply to electric car salary sacrifice?
Optional Remuneration Arrangements rules can apply where an employee gives up salary for a benefit. However, low-emission cars have specific treatment, which is why electric cars can still be tax-efficient under salary sacrifice.
Does salary sacrifice reduce gross salary?
Yes. Salary sacrifice reduces gross salary, which can affect Income Tax, National Insurance and sometimes salary-linked benefits such as pension contributions, bonuses or mortgage affordability.