What Is Salary Sacrifice for a Car?

How does salary sacrifice for a car work?

You agree with your employer to reduce your salary by a set amount, and in return you get a car through your employer's scheme. Because the amount comes off your gross pay, you pay less income tax and usually less National Insurance.

The car is a taxable benefit, so you pay company car tax on it, based on its list price and the appropriate percentage for its CO₂ emissions. Your net cost is:

• the salary you give up
• minus the income tax and National Insurance you save on it
• plus the company car tax on the car

The change is made through your employment contract, so check the terms carefully before agreeing.

A worked example

This is the Salary Sacrifice calculator's worked example, using 2026/27 rates. An employee in England earning £60,000 gives up £500 a month (£6,000 a year) for a fully electric car with a £40,000 list price, and compares it with a £500-a-month personal lease.

• Income tax saved: £6,000 × 40% = £2,400.
• National Insurance saved: £120. Above £4,189 a month, employee National Insurance is 2%, so a higher earner saves much less National Insurance than income tax.
• Company car tax: £40,000 × 4% = £1,600 benefit, taxed at 40% = £640.
• Net cost: £6,000 − £2,400 − £120 + £640 = £4,120 a year.
• Saving against a £6,000 personal lease: £1,880 a year.

For a basic-rate taxpayer earning £35,000 with the same car, the income tax saved is £1,200 and the National Insurance saved is £480 (8%), the company car tax is £320, and the net cost is £4,640: a saving of £1,360 a year.

Why electric cars are usually the best fit

Because of the tax rules. In 2026/27 a fully electric car is taxed on 4% of its list price, so the company car tax is small compared with the tax and National Insurance saved.

For cars with CO₂ emissions above 75 g/km, the rules for optional remuneration arrangements apply: you are taxed on the higher of the normal car benefit and the salary you give up. Cars of 75 g/km or less, which includes electric cars and many plug-in hybrids, are taxed on the normal car benefit.

For a petrol car above 75 g/km, you are taxed on at least the salary you gave up, which cancels the income tax saving. At best, what is left is the National Insurance saving.

What is usually included?

Depending on the scheme, the monthly amount may include:

• insurance
• servicing and maintenance
• breakdown cover
• tyres
• vehicle tax

That makes budgeting simpler, but it also means comparisons must be fair. A salary sacrifice amount that includes insurance and maintenance is not directly comparable with a personal lease payment that includes neither.

What should you check before joining?

• the effect on your monthly take-home pay
• what is included, especially insurance
• what happens if you leave your job, go on parental leave or are off sick, and whether there is early termination protection
• the effect on your pension contributions, which depends on how your employer's scheme handles salary sacrifice
• the effect on statutory payments such as maternity pay, which are based on your reduced earnings
• the effect on mortgage and other borrowing applications
• whether the mileage allowance suits you

Who does it suit best?

• higher-rate taxpayers choosing an electric car
• employees whose employer offers a scheme with good exit terms
• drivers who want simple, all-inclusive monthly budgeting
• people who would otherwise pay separately for insurance, maintenance and servicing

Who should be more cautious?

• employees on lower pay: a scheme cannot reduce your cash pay below the National Minimum Wage
• anyone who may change jobs soon, if the scheme's exit terms are weak
• anyone planning a mortgage application
• anyone for whom a lower salary would reduce pension contributions or other salary-linked benefits

The bottom line

Salary sacrifice for a car can save a lot, especially on an electric car and for higher-rate taxpayers. But it is not a normal lease quote: the real answer is in your net pay and the package details. Work out your net cost, compare it fairly with a personal lease, and check the effect on your pension and borrowing before you sign.