Salary sacrifice car schemes

With a salary sacrifice car scheme you lease a new car through your employer and pay for it out of your gross salary, so the monthly cost comes off before Income Tax and National Insurance. The car then counts as a company car, so you pay benefit-in-kind tax on it. That tax is low for fully electric cars, which is why almost every NHS, council and school scheme is now built around electric and low-emission models. The monthly price usually includes insurance, servicing, tyres, breakdown cover and road tax.

How the arrangement works

Your employer leases the car from a provider and makes it available to you. Your contract is changed so your salary goes down by the monthly lease amount, for a fixed term of a few years. You pay tax and NI on the lower salary, and the saving offsets part of the lease cost.

The car is a benefit in kind. HMRC values it as a percentage of the car’s list price, set by its CO2 emissions and fuel type. Electric cars sit in the lowest percentage band, which rises gradually under rates the government has set out in advance. Petrol, diesel and most hybrid cars attract much higher percentages. HMRC’s company car tax calculator works out the yearly figure for any model.

Salary sacrifice adds a rule of its own. For cars with low emissions, including all fully electric cars, the taxable value is the normal company car benefit. For higher-emission cars, it is whichever is greater: the company car benefit or the salary you gave up. That wipes out most of the saving on a conventional car, so schemes rarely offer them.

A worked example

The figures below are hypothetical, to show the mechanics.

Say you earn £45,000 in England and choose an electric car with a gross monthly cost of £500. Your salary drops by £500 a month. On that £500 you no longer pay £100 Income Tax and £40 NI, so your take-home pay falls by £360.

The car’s benefit in kind then adds a small amount of taxable income. Your employer adjusts your tax code, or taxes the benefit through payroll, so you pay 20 per cent tax on that value spread over the year. For an electric car the result is usually a modest extra deduction each month. A higher rate taxpayer saves tax at 40 per cent on the sacrifice, and the benefit in kind is taxed at 40 per cent too.

The fair test of whether the scheme saves you money is the after-tax monthly cost against what you would pay to lease, insure and maintain the same car privately. The take-home pay calculator shows the effect of a lower gross salary.

The limits on who can join

Your pay after the sacrifice must stay at or above the National Living Wage, which is £12.71 an hour for people aged 21 and over from 1 April 2026. This rules out the scheme for many people on lower NHS bands or spine points, especially if part-time. Employers also set their own conditions, such as passing probation, holding a permanent contract, or having more time left on your contract than the lease runs for.

Most schemes run a credit or affordability check through the provider, and you must hold a full driving licence.

The costs if things change

Early termination charges are the biggest risk. If you leave your job, take a career break or ask to end the lease early for other reasons, you may have to pay a charge, sometimes several months’ rental. Many NHS and council schemes waive or reduce the charge for certain life events, such as redundancy, long-term sickness, pregnancy or death, but the list differs between schemes.

Maternity leave and long sickness need planning. While you are on half pay or statutory pay, there may not be enough salary to sacrifice. Some employers keep the agreement going and others pause it or ask you to pay from net income. Ask how your scheme handles this before you order.

Salary sacrifice lowers your contractual pay, which can affect pension build-up, life cover based on salary, mortgage applications and the pay used for Statutory Maternity Pay. The salary sacrifice guide explains these knock-on effects.

What to compare between schemes

• The full monthly gross cost and what it includes (insurance, tyres, home charger, breakdown)
• Annual mileage allowance and the charge per mile over it
• Damage charges when the car is returned
• Early termination terms and the life events covered
• How the benefit in kind will be taxed and whether it appears on a P11D or through payroll

The benefit in kind is reported to HMRC at the end of the tax year, either through payroll or on a P11D. P45, P60 and P11D explains which form shows what.

If you use the car for work

Business mileage in a salary sacrifice car is treated as company car mileage. Your employer can reimburse you using HMRC’s advisory rates for company cars, which are set separately from the approved rates for using your own vehicle. If you drive a lot for work in your own car, an essential car user allowance or mileage claims may work out better than a scheme car.