What are salary sacrifice car schemes?
Salary sacrifice car schemes enable employees to source a new car for a fixed monthly cost and period of time by sacrificing an amount from their gross salary in exchange for a fully maintained and insured car, with no deposits or upfront payments. The employee can save on income tax and national insurance (NI) contributions, and most of the value-added tax (VAT) they would pay on a personal lease, while the employer saves NI on the sacrificed salary, making it an attractive benefit.
To be eligible, employees must have been employed for a minimum period and earn over the national living wage after the sacrificed salary has been taken.
A leasing organisation will lease a car to the employer, which will pay the leasing costs and manage a separate salary sacrifice agreement with its employees. The employee selects a car from the options, which include electric, hybrid, petrol and diesel. Tusker offers used, best-condition cars, while Octopus only offers electric vehicles.
Fleet funding options include contract hire, contract purchase, finance lease, employee car ownership, hire purchase and outright purchase. Terms start from 24 months and go up to 60 months. Tusker has introduced 54- and 60-month agreements to make it more affordable.
Most providers manage car maintenance, servicing, breakdown cover and insurance, payments, tax calculations and other administration. Additional services include electric charge points, relief cars and the option to offset tailpipe emissions against a verified carbon project.
According to Venson, early termination protection is important to ensure employer risk is negligible in cases of an employee returning their car early, due to resignation, long-term illness or redundancy. As long as the termination occurs after an exclusion period, this mitigates any charges that would be employers’ responsibility.
Salary sacrifice electric car schemes can also help reach employers’ environmental, social and governance, and net-zero carbon targets.
What are the cost implications?
Depending on how employers operate their schemes, and which provider they choose, costs can vary. According to Venson, costs can be reduced if a provider is already providing an employer with leasing or fleet management services for fleet cars.
Fleet Alliance offers an example of an all-electric MG4 with a gross monthly lease cost of £496 per month deducted from the salary of a 40% taxpayer employee, on a four-year contract with a mileage limit of 5,000 miles a year, before tax in calculated. After the income tax and NI savings, the net salary sacrificed is £326 per month, a saving of £170 per month. Over the lease contract, employee savings add up to almost £8,160.
Some providers also offer the option to pass back all or part of any employer Class 1A NI savings made from electric cars on the scheme.
Are there any tax or legal issues?
Employees can save income tax and NI contributions depending on their chosen car, while employers save Class 1A NI on the sacrificed salary for electric cars. The car is considered a taxable benefit, meaning company car, or benefit-in-kind (BIK), tax based on CO2 emissions is payable. Ultra-low and zero emission cars have a lower rate of 2%, whereas the rate for petrol or diesel cars can be as high as 37%. BIK rates for electric cars will rise from 2% to 3% in the 2025/26 financial year and increase by one percentage point each year until 2028.
The amount of tax an employee pays also depends on how much they earn annually and the P11D value of the vehicle. It is important to ensure that employees do not fall below the national living wage (NLW) by joining a scheme. By building it into its system, Tusker has ensured that only cars that will not take an employee below the NLW are shown.
If an employee joins a salary sacrifice arrangement and reduces their contractual salary, terms and conditions need to be updated in relation to any VAT or NI contributions increase.
What are the current market trends or developments?
The British Vehicle, Rental and Leasing Association’s (BVRLA) Leasing outlook January 2025 report reveals that the number of salary sacrifice arrangements has increased by 51%, while cars acquired through such schemes are almost 100% electric, with a 60% year-on-year growth rate.
Tusker has seen more organisations adopting its electric car-only or electric and hybrid schemes, and Octopus Electric Vehicles’ October 2024 Octopus EV market trends revealed that the top reason drivers switched to electric vehicles, at 55%, is wanting to make a positive impact for the planet. Meanwhile, Fleet Alliance has seen a strong response to used electric cars through salary sacrifice arrangements and expects this to grow in popularity throughout the year.
The increase in employer NI contributions to 15%, and national living wage to £12.21, an hour from 6 April could affect how much lower-paid staff can sacrifice and the amount of NI savings an employer can share.
Who are the main providers?
Providers of car salary sacrifice arrangements include: ALD Automotive, Alphabet, Arnold Clark, Arval, Ayvens, Car Benefit Solutions, Corparison, DreamLease, Fleet Alliance, Fleet Evolution, Hippo Salary Sacrifice, Lex Autolease, Lookers Leasing, Loveelectric, Novuna Vehicle Solutions, Octopus Electric Vehicles, Pendragon Vehicle Management, Pink Salary Exchange, Salsac Jurni, Select Car Leasing, SG Fleet, The Electric Car Scheme, Tusker, Venson, WeVee and Zenith.
