Salary Sacrifice Explained
Salary sacrifice allows an employee to exchange part of their gross salary for a benefit provided by their employer.
One of the most popular uses of salary sacrifice in the UK is the provision of company cars, particularly electric vehicles.
By reducing gross salary and receiving a company car instead, employees may benefit from lower Income Tax and National Insurance costs while gaining access to a new vehicle through their employer.
For employers, salary sacrifice schemes can support recruitment, employee retention and sustainability objectives while potentially reducing National Insurance liabilities.
This guide explains how salary sacrifice works, who can benefit, the tax implications and where to find additional DriveSmart tools and calculators.
What Would You Like To Do?
What Is Salary Sacrifice?
In simple terms, salary sacrifice means giving up part of your gross salary in exchange for a benefit, such as a car.
Schemes also exist for other benefits such as childcare (limited), bikes or pension contributions.
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.
Salary Sacrifice Compared With Personal Leasing
Many employees compare salary sacrifice with personal leasing, PCP finance or purchasing a vehicle privately.
Because salary sacrifice schemes often include maintenance, insurance and tax savings, the overall cost can sometimes be lower than arranging a similar vehicle independently.
The actual outcome depends on the employee's salary, tax position and the vehicle selected.
Why Electric Cars Are Popular In Salary Sacrifice Schemes
Electric cars currently attract lower Benefit-in-Kind (BIK) tax rates than most petrol and diesel vehicles.
As a result, many employees can access a new electric company car through salary sacrifice while paying relatively little company car tax.
Combined with Income Tax and National Insurance savings, this can make electric vehicles particularly attractive within salary sacrifice schemes.
You can explore available electric vehicles using our Electric Car Search tools.
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.
Can Salary Sacrifice Save Me Money?
Many employees first encounter salary sacrifice when comparing the cost of running a car privately against obtaining a vehicle through their employer.
Potential savings can arise from:
- Income Tax savings
- National Insurance savings
- Employer purchasing power
- Low electric car Benefit-in-Kind tax rates
The exact saving depends on your salary, tax rate, vehicle choice and employer scheme.
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
What is salary sacrifice?
Salary sacrifice allows an employee to give up part of their gross salary in exchange for a benefit provided by their employer, such as a company car.
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.
Can salary sacrifice save me money?
Salary sacrifice can save money where the Income Tax and National Insurance savings, employer purchasing power and low Benefit-in-Kind tax outweigh the cost of the vehicle benefit.
Why do electric cars work well with salary sacrifice?
Electric cars currently attract lower Benefit-in-Kind tax rates than most petrol and diesel cars, which can make them attractive within salary sacrifice schemes.
Is salary sacrifice better than personal leasing?
Salary sacrifice may be cheaper than personal leasing where the scheme includes tax savings, maintenance, insurance and employer purchasing power. The result depends on the vehicle, salary, tax position and scheme terms.
Do I still pay company car tax under salary sacrifice?
Yes. A car provided through salary sacrifice is normally treated as a company car, so the employee pays Benefit-in-Kind tax based on the car's taxable value.
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.
Can employers save money through salary sacrifice?
Employers may benefit from National Insurance savings and can use salary sacrifice schemes to support recruitment, retention and electric vehicle adoption.