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Understanding HMRC Electric Car Salary Sacrifice in the UK
With the UK government pushing for net zero carbon emissions by 2050, the demand for electric vehicles (EVs) has surged. One of the most tax-efficient ways for employees to get an electric car is through a salary sacrifice scheme. HMRC has specific rules governing how this scheme works, and recent changes in tax rates have made electric car salary sacrifice an attractive option for many employees and employers.
What Is an Electric Car Salary Sacrifice Scheme?
A salary sacrifice scheme allows employees to give up a portion of their gross salary in exchange for a non-cash benefit—in this case, an electric car. This is a win-win situation for both employees and employers. Employees get an EV at a lower cost, while employers can offer an attractive benefit without significantly increasing costs.
When an employee participates in a salary sacrifice scheme, their gross salary is reduced before Income Tax and National Insurance (NI) contributions are calculated. This means lower taxable income, resulting in tax savings. However, the employee must pay Benefit-in-Kind (BiK) tax on the car, which is much lower for electric vehicles compared to petrol or diesel cars.
Latest Tax Benefits and Incentives
One of the main reasons why electric car salary sacrifice schemes have gained popularity is the favourable tax treatment for EVs. Here are the key tax benefits available as of January 2025:
1. Benefit-in-Kind (BiK) Rates for Electric Cars
The BiK rate is a tax levied on employees for using a company-provided car. For electric cars, the BiK rate remains at 2% for the 2024/25 tax year. This is significantly lower than the rates for petrol and diesel cars, which can go as high as 37%.
Tax Year | Electric Car BiK Rate |
2023/24 | 2% |
2024/25 | 2% |
2025/26 | Expected to rise slightly (awaiting confirmation) |
For example, if an employee takes an electric car worth £40,000, the taxable benefit at 2% BiK is £800. If the employee is a 20% taxpayer, they will pay £160 per year (£13.33 per month) in BiK tax. If they are a 40% taxpayer, they will pay £320 per year (£26.67 per month).
This is drastically lower than what they would pay for a petrol or diesel car, making EVs through salary sacrifice highly cost-effective.
2. National Insurance Savings for Employers
Because an employee’s gross salary is reduced, the employer also saves on National Insurance contributions. The standard Employer NI rate is 13.8%, which means the employer saves 13.8% on the sacrificed salary.
For example:
If an employee sacrifices £500 per month, the employer saves £69 per month in National Insurance contributions.
Over a 3-year lease term, this can amount to over £2,400 in savings per employee.
3. No Road Tax (VED) for Electric Vehicles
Until April 2025, EVs are exempt from Vehicle Excise Duty (VED) (road tax). However, from April 2025 onwards, electric cars will be subject to standard VED rates, which means new EV owners will have to start paying road tax.
4. No Additional Tax for Charging at Work
HMRC confirms that charging an electric company car at work is not taxable. This means that if an employer provides free charging, employees do not have to pay tax on this benefit.
However, if an employer reimburses an employee for charging at home, it may be considered a taxable benefit unless mileage can be recorded and reimbursed under approved mileage rates.
How Much Can Employees Save?
One of the biggest attractions of an electric car salary sacrifice scheme is the potential savings. Let’s break this down:
Example Calculation (for a 20% Taxpayer)
Car Model: Tesla Model 3 (RRP: £42,000)
Monthly Lease Cost (before tax benefits): £600
Salary Sacrifice Reduction: £600
Income Tax Saving (20%): £120
National Insurance Saving (12%): £72
BiK Tax (2%): £14
Final Monthly Cost: £422 (instead of £600)
This means a 20% taxpayer saves £178 per month—or over £6,400 over three years.
Example Calculation (for a 40% Taxpayer)
Income Tax Saving (40%): £240
National Insurance Saving (2%): £12
BiK Tax (2%): £28
Final Monthly Cost: £376
A 40% taxpayer saves £224 per month, amounting to over £8,000 over three years.
Eligibility Criteria: Who Can Benefit?
While the scheme is highly beneficial, not everyone is eligible. Here’s what employers and employees need to keep in mind:
Employer Requirements
The employer must be willing to offer the scheme.
The scheme must be set up as a formal agreement and documented in employment contracts.
Employers must ensure that salary reductions do not bring employees below the National Minimum Wage.
The employer must administer the scheme correctly to stay compliant with HMRC regulations.
Employee Requirements
Employees must agree to the salary sacrifice arrangement.
The sacrifice must not bring their salary below the minimum wage.
Some employers may have additional eligibility criteria, such as minimum employment duration or probationary periods.
Which Electric Cars Are Eligible?
To qualify for the lowest BiK rates, the electric car must have CO2 emissions of 0g/km. Plug-in hybrids with emissions below 75g/km are also eligible, but they do not get the full tax benefits.
Popular eligible models for 2025 include:
Tesla Model 3 / Model Y
Polestar 2
Volkswagen ID.3 / ID.4
Hyundai Ioniq 5
BMW i4
Nissan Ariya
Kia EV6
All these models qualify for the 2% BiK rate and significant tax savings through salary sacrifice.
Why Employers Should Consider Offering Salary Sacrifice for Electric Cars
Employers benefit significantly from these schemes as well. Some advantages include:
Reduced Employer NI Contributions (savings of 13.8% per employee)
A Greener Corporate Image – supports ESG (Environmental, Social, and Governance) goals
Higher Employee Retention & Satisfaction – offering a valuable perk
Attracting New Talent – many employees now prefer workplaces with sustainable benefits
Corporate Social Responsibility (CSR) Benefits – contributing to lower carbon emissions
How to Set Up an HMRC Electric Car Salary Sacrifice Scheme
Now that we've covered the benefits, tax savings, and eligibility criteria, let’s dive into the practical side—how employers can set up a salary sacrifice scheme for electric cars.
Many UK businesses are offering EV salary sacrifice schemes to attract and retain talent while also meeting their corporate sustainability goals. However, to stay compliant with HMRC regulations, it’s crucial to set up the scheme correctly.
Step-by-Step Guide to Setting Up a Salary Sacrifice Scheme
Step 1: Assess Business Suitability and Interest
Before setting up a salary sacrifice scheme, employers should evaluate whether it is suitable for their workforce. Key considerations include:
Workforce Profile: Are employees earning enough to afford the salary reduction?
Minimum Wage Compliance: Employees cannot sacrifice salary below the National Minimum Wage (NMW).
Demand & Interest: Conducting an internal survey can help gauge employee interest in the scheme.
Employers should also determine:
✅ How many employees will participate
✅ What car models to offer
✅ Budget considerations and administrative costs
💡 Example: A company with 50 employees found that 30% were interested in switching to an EV. After analysis, they introduced three pre-approved models for salary sacrifice.
Step 2: Choose a Leasing Provider
Employers do not need to buy electric cars outright. Instead, most opt for leasing companies that provide:
A selection of EVs
Insurance, servicing, and maintenance
Breakdown cover
Charge point installation options
Popular UK salary sacrifice leasing providers include:
🚗 Tusker
🚗 Octopus Electric Vehicles
🚗 Lex Autolease
🚗 Zenith
Most leasing agreements last 2-4 years, and costs depend on:
Vehicle choice
Lease duration
Estimated mileage
💡 Example: A London-based company partnered with Octopus EV, offering a Tesla Model Y lease at £450 per month (pre-tax savings) for employees.
Step 3: Adjust Employment Contracts
HMRC requires a clear salary sacrifice agreement to be reflected in employee contracts. Employers must:
✅ Update employment contracts to reflect salary reduction
✅ Specify non-cash benefits (i.e., use of an electric car)
✅ Outline duration & early termination clauses
If an employee leaves the company early, employers must clarify who covers the remaining lease payments. Some leasing providers offer early termination insurance to cover this risk.
💡 Example Clause: "Your gross salary will be reduced by £500 per month in exchange for the lease of a Tesla Model 3. If you leave the company before the lease term ends, you may be required to pay the outstanding balance or transfer the lease to another eligible employee."
Step 4: Payroll & Tax Adjustments
Employers must ensure that salary adjustments are correctly processed through payroll:
The sacrificed amount must be deducted before tax and NI calculations.
Employers should report the Benefit-in-Kind (BiK) tax through payroll or on a P11D form at the end of the tax year.
If using payrolling benefits, employers must register with HMRC before the tax year starts.
💡 Example Payroll Entry for a 40% Taxpayer:
Description | Amount (£) |
Gross Salary | £50,000 |
Salary Sacrifice (EV) | -£6,000 |
Taxable Income | £44,000 |
National Insurance (NI) | Reduced |
BiK Tax (2%) | £240 annually |
🚀 Result: The employee saves on tax and NI, while the employer reduces their NI liability.
Step 5: Communicate the Scheme to Employees
Many employees are unaware of the benefits of salary sacrifice for electric cars. Employers should:
Host informational sessions
Provide cost-saving examples
Explain BiK tax implications
👨💼 Example: A company ran an internal webinar explaining how employees could save £150-£250 per month on an EV lease compared to a personal lease. 30 employees signed up within the first two months!
Common Mistakes to Avoid in Salary Sacrifice Schemes
🚨 1. Not Checking National Minimum Wage (NMW) Compliance:
HMRC strictly enforces that salary sacrifice cannot reduce an employee’s earnings below the NMW.
💡 Example: If an employee earns £24,000 annually (£2,000/month) and the NMW is £10.42/hour, they cannot sacrifice more than £200-£300 per month, depending on hours worked.
🚨 2. Failing to Report BiK Tax Correctly:
Employers must report BiK tax via payroll or a P11D form. Failing to do so can lead to penalties.
✅ Solution: Register for payrolling benefits with HMRC before the tax year starts.
🚨 3. Not Having a Contingency Plan for Employee Departures:
If an employee leaves mid-contract, the employer may be liable for the remaining lease payments.
✅ Solution: Choose a leasing provider that offers:
Early termination insurance
Lease transfer options
💡 Example: A company using Tusker had two employees leave early, but their insurance covered the lease termination fees, saving the business over £5,000.
🚨 4. Overcomplicating the Scheme:
Some employers introduce too many restrictions, reducing uptake.
✅ Solution: Keep the scheme simple and accessible with:
A shortlist of 5-10 popular EV models
A streamlined application process
Employer Benefits: Why Businesses Should Offer EV Salary Sacrifice
Beyond tax savings, why should businesses bother?
✔ Reduced Employer NI Contributions – Employers save 13.8% on the sacrificed salary
✔ Greener Company Image – Supports corporate sustainability targets
✔ Attract & Retain Talent – Employees love low-cost access to EVs
✔ No Upfront Costs – Leasing providers handle vehicle procurement
✔ Improved Employee Satisfaction – Lower commuting costs = happier employees
🚀 Example: A fintech startup introduced EV salary sacrifice, and within a year, 25% of employees signed up, significantly reducing company-wide CO2 emissions.
Legal and HMRC Compliance Considerations for Electric Car Salary Sacrifice
In the previous sections, we explored the benefits, cost savings, and the step-by-step process of setting up an electric car salary sacrifice scheme. Now, we turn to the legal and compliance aspects that employers and employees must be aware of.
As with any tax-efficient scheme, HMRC has specific rules and regulations governing salary sacrifice arrangements. Failing to comply with these regulations can lead to tax penalties and financial liabilities.
HMRC Rules on Salary Sacrifice Schemes
HMRC has clear guidelines on how salary sacrifice schemes should be structured. To ensure compliance, employers must follow these key principles:
The salary sacrifice agreement must be a formal contractual change to an employee’s terms and conditions.
The agreement cannot be changed frequently. If employees can opt in and out at will, HMRC may not recognize it as a valid salary sacrifice scheme, which could lead to tax and National Insurance liabilities.
The employee’s gross salary must not fall below the National Minimum Wage (NMW).
Benefit-in-Kind (BiK) tax must be correctly calculated and reported to HMRC.
The employer must determine whether pension contributions, overtime, bonuses, or redundancy pay are calculated based on the pre-sacrifice or post-sacrifice salary.
Failure to comply with these regulations can result in:
Backdated tax and National Insurance charges.
Penalties for incorrect payroll processing.
Additional employer liabilities if employees leave mid-contract.
Impact of Salary Sacrifice on Pensions and Benefits
One of the most important considerations when implementing a salary sacrifice scheme is how it affects an employee’s other entitlements.
Workplace Pension Contributions
Employers and employees should clarify whether pension contributions are calculated based on:
The original gross salary (pre-sacrifice)
The reduced salary (post-sacrifice)
Many employers continue to calculate pension contributions based on the pre-sacrifice salary to ensure that employees’ retirement savings are not negatively affected. However, this should be clearly communicated to employees.
If an employee is auto-enrolled into a pension scheme, reducing their salary through a salary sacrifice arrangement could lower their contributions. Some employees may opt to make additional voluntary contributions to compensate for this reduction.
Statutory Maternity Pay (SMP) and Paternity Pay
Statutory Maternity Pay and Statutory Paternity Pay are calculated based on an employee’s average earnings during the qualifying period (weeks 17 to 25 of pregnancy).
If an employee enters a salary sacrifice scheme before or during this period, their reduced salary could lower their SMP or SPP entitlement. Employees planning to take parental leave should consider this before committing to salary sacrifice.
Redundancy Pay and Other Benefits
If redundancy pay is calculated based on post-sacrifice salary, the employee may receive a lower payout than they would have based on their original salary. Employers should clarify how redundancy payments will be handled.
Other benefits that could be affected include:
Mortgage applications (lenders may assess affordability based on post-sacrifice salary).
Life insurance and income protection policies (some benefits are linked to salary levels).
Employees should be advised to review their financial situation before committing to a salary sacrifice scheme.
What Happens if an Employee Leaves the Scheme Early?
A common concern with salary sacrifice arrangements is what happens if an employee leaves the company before the lease term ends.
Most electric car salary sacrifice schemes involve fixed-term leases, typically lasting two to four years. If an employee leaves before the contract ends, there are several possible outcomes:
Early Termination Fees
Most leasing companies charge a fee for early termination, which could be several thousand pounds.
Some employers pass this cost on to the employee, while others absorb part of the fee as a company expense.
Lease Transfer to Another Employee
Some employers allow the lease to be transferred to another eligible employee.
This can reduce financial risk for both the employer and the departing employee.
Buyout Option
Some schemes allow employees to purchase the vehicle at a discounted rate if they leave the company before the lease term ends.
Employer Covers the Remaining Payments
In some cases, if an employer has agreed to cover the lease, they may continue making payments until the term ends.
This is more common for businesses with large salary sacrifice schemes where turnover is expected.
To avoid disputes, employers should include clear early exit terms in their salary sacrifice agreements.
Future of Electric Car Salary Sacrifice in the UK
The salary sacrifice scheme for electric cars has gained popularity due to favorable tax treatment, but future policy changes could impact its benefits.
Changes in Vehicle Excise Duty (VED)
Currently, electric cars are exempt from road tax (VED), but from April 2025, all EVs will be required to pay standard road tax rates. While this will increase running costs slightly, it will not significantly impact the benefits of salary sacrifice.
Potential Changes to Benefit-in-Kind (BiK) Tax
The BiK rate for electric cars is currently 2% and is expected to rise in future tax years. While the government has not confirmed the rate beyond 2025, experts predict a gradual increase to 3% or 4% by 2028.
Tax Year | Expected BiK Rate for EVs |
2024/25 | 2% |
2025/26 | 2% |
2026/27 | 3% (expected) |
2027/28 | 4% (expected) |
Even with a slight increase, EVs will still have a much lower BiK rate than petrol or diesel cars.
Government Incentives and Net Zero Strategy
The UK government remains committed to its net zero emissions target by 2050. While some incentives, such as the plug-in car grant, have been phased out, salary sacrifice remains one of the most cost-effective ways to obtain an electric car.
Many employers are investing in workplace charging infrastructure to support employees who switch to EVs. Additionally, new government grants are available to businesses for installing EV charge points at workplaces.
Key Takeaways for Employers and Employees
Employers must ensure salary sacrifice schemes comply with HMRC regulations, including National Minimum Wage rules and BiK tax reporting.
Employees should consider how salary sacrifice affects their pension, benefits, and redundancy pay before signing up.
Early termination fees can be significant, so clear exit strategies should be included in agreements.
Future changes in tax policy may impact savings, but salary sacrifice remains one of the most cost-effective ways to lease an electric car.
Employers benefit from lower National Insurance contributions, increased employee satisfaction, and improved sustainability credentials.
The electric car salary sacrifice scheme is one of the best incentives for UK employees to access low-cost, zero-emission vehicles. However, both employers and employees should fully understand the legal and financial implications before committing to the scheme.
Summary of All the Most Important Points Mentioned In the Above Article
HMRC’s electric car salary sacrifice scheme allows employees to lease an EV by reducing their pre-tax salary, lowering tax and National Insurance contributions.
Electric cars have a low Benefit-in-Kind (BiK) tax rate of 2% until April 2025, making them significantly cheaper than petrol or diesel cars.
Employers benefit from reduced National Insurance contributions, enhanced employee retention, and improved corporate sustainability credentials.
Employees must ensure that salary sacrifice does not reduce their earnings below the National Minimum Wage to remain eligible.
The scheme can impact pensions, maternity pay, student loan repayments, and mortgage applications due to the reduction in taxable income.
Early termination of a salary sacrifice lease may incur financial penalties unless covered by employer policies or leasing provider agreements.
Future tax changes, including rising BiK rates and Vehicle Excise Duty (VED) for EVs from April 2025, may affect long-term savings.
FAQs
Q1. Can you use an electric car salary sacrifice scheme if you are on a fixed-term contract?
A. It depends on the employer and leasing provider. Some employers allow fixed-term contract employees to participate, but they may require the lease term to be shorter than the contract length to avoid early termination issues.
Q2. Does an electric car salary sacrifice scheme affect your ability to get a mortgage?
A. Yes, salary sacrifice reduces your gross income, which can lower the amount a lender is willing to offer for a mortgage. Some lenders may consider your pre-sacrifice salary, but this varies by lender.
Q3. Can you salary sacrifice an electric car if you are on maternity or paternity leave?
A. It depends on your employer’s policy. If your salary is reduced during maternity or paternity leave, you may not meet the minimum earnings requirement for salary sacrifice. Some employers may pause or adjust payments.
Q4. Can you keep the car at the end of the salary sacrifice agreement?
A. Typically, no. Salary sacrifice cars are leased, and at the end of the term, they are returned to the leasing provider. Some providers may offer a buyout option, but this is not guaranteed.
Q5. What happens to the salary sacrifice arrangement if your employer goes out of business?
A. If your employer becomes insolvent, the salary sacrifice scheme may end, and you could be responsible for the remaining lease payments, depending on the contract terms. Some leasing companies offer protections for such situations.
Q6. Are electric car salary sacrifice schemes available for self-employed individuals?
A. No, salary sacrifice schemes are only available to employees on PAYE payroll. Self-employed individuals cannot use salary sacrifice but may claim tax deductions for business-use EVs.
Q7. Can you switch to a different electric car before your salary sacrifice lease ends?
A. Generally, no. Most salary sacrifice agreements are fixed-term leases, and switching cars would require early termination, which usually incurs significant fees. Some providers allow upgrades under specific conditions.
Q8. Does an electric car salary sacrifice scheme affect student loan repayments?
A. Yes, since salary sacrifice reduces your gross income, it may lower your student loan repayment amount if you are on an income-based repayment plan.
Q9. What happens if your electric car is written off or stolen during the salary sacrifice period?
A. Most salary sacrifice schemes include comprehensive insurance, but you may still be liable for excess payments. The leasing provider will typically arrange for a replacement vehicle, but terms vary.
Q10. Can employees on probation periods join an electric car salary sacrifice scheme?
A. Some employers restrict salary sacrifice participation during probation periods, as new employees may leave before the lease term ends. Policies vary between employers.
Q11. Can an electric car salary sacrifice be combined with other benefits like Cycle to Work or childcare vouchers?
A. Yes, salary sacrifice for an electric car can be used alongside other salary sacrifice schemes, but the combined deductions must not reduce your salary below the National Minimum Wage.
Q12. Does salary sacrifice affect your entitlement to child benefit?
A. Yes, salary sacrifice reduces your taxable income, which may lower or eliminate the High Income Child Benefit Charge if your adjusted income falls below £50,000 per year.
Q13. Can you use your salary sacrifice electric car for business mileage claims?
A. Yes, you can claim HMRC-approved mileage rates for business journeys, but the reimbursement is lower than for petrol or diesel cars, currently at 9p per mile for fully electric vehicles.
Q14. Is there a credit check for employees joining an electric car salary sacrifice scheme?
A. Usually, no. The lease is taken out in the employer’s name, so employees do not undergo personal credit checks, but the employer may have internal eligibility criteria.
Q15. Are part-time employees eligible for an electric car salary sacrifice scheme?
A. Yes, but the salary sacrifice must not bring their earnings below the National Minimum Wage, which can limit eligibility for lower-paid part-time workers.
Q16. Can you salary sacrifice a second electric car if you already have one through the scheme?
A. This depends on the employer’s policy. Some employers allow employees to have multiple salary sacrifice cars, while others restrict participation to one vehicle at a time.
Q17. What are the tax implications if you move abroad while in a salary sacrifice scheme?
A. If you leave the UK, your employer may need to terminate the scheme, and you could face early termination charges. Tax liabilities will depend on your new country of residence.
Q18. How do you report an electric car salary sacrifice benefit to HMRC?
A. Employers must report the Benefit-in-Kind (BiK) tax through payrolling benefits or via a P11D form at the end of the tax year. Employees do not need to report it separately.
Q19. Can you opt out of a salary sacrifice scheme if your financial situation changes?
A. Most schemes do not allow voluntary opt-outs unless there is a significant lifestyle change, such as redundancy, divorce, or a partner’s pregnancy. Policies vary between employers.
Q20. Are electric car charging costs included in salary sacrifice schemes?
A. No, charging costs are not typically included. However, some schemes offer bundled home charging solutions, and workplace charging is usually tax-free when provided by the employer.
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