Electric car salary sacrifice schemes

Electric car salary sacrifice stays tax efficient because cars with CO2 emissions of 75g/km or less are outside the optional remuneration rules, so the employee is taxed on the normal company car benefit rather than on the salary given up. For a zero emission car that benefit is 4% of the list price in 2026 to 2027, which is usually far less than the sacrificed salary. The main costs to watch are what happens if the agreement ends early and the effect of lower pay on the minimum wage and statutory payments.

This page explains why the arrangement still works, how the numbers compare, and what employers and employees should agree in advance about early termination. For the general rules on how cars are taxed, see company car tax.

How does an electric car salary sacrifice scheme work?

The employer leases or buys a car and makes it available to the employee for private use. In return, the employee’s contract is varied so that their gross salary is reduced by an agreed amount for the term of the arrangement. Because the car is made available by reason of the employment, a company car benefit charge applies.

HMRC’s Employment Income Manual at EIM25261 (example 6) confirms two points. First, the employee is taxed on the reduced gross salary plus the car benefit. Second, the salary given up is not a payment for private use, so it cannot be deducted from the car benefit. The saving comes entirely from the gap between the salary given up and the much lower taxable value of the car.

Why do the optional remuneration rules not catch electric cars?

Since 6 April 2017, most benefits taken in place of salary have been taxed on the greater of the salary given up and their normal taxable value. Our page on salary sacrifice and optional remuneration rules explains how that comparison works. Section 120A of ITEPA 2003 carves out cars with CO2 emissions of 75 grams per kilometre or less. HMRC’s guidance at EIM44060 and in guide 480, Appendix 12, says these cars continue to be taxed on the cash equivalent under the normal rules “without having to make a comparison with the salary foregone”.

The exclusion covers fully electric cars and any plug in hybrid with an official CO2 figure of 75g/km or less. Above that figure, the employee is taxed on at least the full salary given up, which removes most of the advantage.

Connected benefits are also protected. Section 239, which exempts payments and benefits connected with a taxable car such as insurance, servicing and breakdown cover, is one of the “excluded exemptions” listed at EIM44131 that continue to apply under salary sacrifice. HMRC’s table at EIM23900 also confirms there is no taxable benefit when the employer pays for a home chargepoint or a public charging card for a company electric car, and that electricity is not “fuel”, so there is no car fuel benefit charge. See workplace EV charging for the charging rules in more detail.

What is the taxable benefit on an electric car?

The benefit is the car’s list price multiplied by the appropriate percentage in section 139 ITEPA 2003. For 2026 to 2027 the percentage for a car with zero CO2 emissions is 4%. Plug in hybrids with emissions of 1 to 50g/km range from 4% to 16% depending on their electric range, and cars from 51 to 74g/km from 17% to 21%.

Tax year	Zero emission appropriate percentage
2026 to 2027	4%
2027 to 2028	5%
2028 to 2029	7%
2029 to 2030	9%

The 2027 to 2028 rate was legislated in Finance Act 2023, and the government confirmed the increases of 2 percentage points a year for 2028 to 2029 and 2029 to 2030 at Autumn Budget 2024. A three or four year scheme should be costed using the rising percentages, not just the current one.

The employer pays Class 1A National Insurance on the benefit, at 15% for 2026 to 2027, whether the car is reported on a P11D or taxed through payroll. See Class 1A National Insurance.

How do the numbers compare?

Illustration only. An employee in England earning £40,000 sacrifices £400 a month (£4,800 a year) for a fully electric car with a list price of £40,000. Their earnings are within the basic rate band and above the National Insurance primary threshold, so the 2026 to 2027 rates are 20% income tax, 8% employee National Insurance and 15% employer National Insurance.

	£4,800 taken as salary	£4,800 sacrificed for the car
Employee income tax	£960	£320 (20% of £1,600 benefit)
Employee National Insurance	£384	Nil
Employer Class 1 National Insurance	£720	Nil
Employer Class 1A National Insurance	Nil	£240 (15% of £1,600)

The employee pays £1,024 less tax and National Insurance than if the £4,800 had been paid as salary, and the employer saves £480. Scottish taxpayers use different income tax rates, and the figures change each year as the appropriate percentage rises.

What happens if the agreement ends early?

Most schemes run for a fixed term, typically matching the employer’s lease. Problems arise when the employee leaves, goes on long term leave or simply wants to stop. Several separate questions need answering.

Can the employee just stop?

HMRC’s EIM42767 explains that if an employee can give up a benefit at any time and return to their original salary, the benefit may be “money’s worth” and taxed as salary under the Heaton v Bell principle. HMRC accepts that a variation lasting 12 months or more does not have that effect. HMRC’s employer guidance allows a salary sacrifice to be changed where a lifestyle change significantly alters the employee’s finances, such as marriage, divorce or a partner becoming redundant or pregnant. Other early exits should be limited and set out in the agreement.

How is the car benefit adjusted?

Under section 143 ITEPA 2003, as explained in guide 480 chapter 12, the benefit is reduced for days the car is unavailable: days after it is last available to the employee, and any period of 30 or more consecutive days when it is not available. A car handed back on leaving is only taxed up to that date.

Who pays the early termination charge?

If the employer’s lease carries a charge for ending early, whether any of that cost is passed to the employee is a matter for the salary sacrifice agreement, and it should be written down before the car is ordered. If the employer recovers it by deduction from final pay, the minimum wage rules still apply to that final pay reference period. The government’s Calculating the minimum wage guidance says a deduction for an event the worker is contractually liable for, linked to their own voluntary conduct such as choosing to resign, does not reduce minimum wage pay. Deductions that are for the employer’s own use and benefit in other circumstances do. The agreement should therefore say clearly how events outside the employee’s control, such as redundancy, ill health or death, are treated.

What about maternity and other statutory leave?

HMRC’s guidance notes that salary sacrifice can reduce statutory payments such as Statutory Maternity Pay, and can remove entitlement altogether if average weekly earnings fall below the lower earnings limit, which is £129 a week for 2026 to 2027. Employers should check the effect on the relevant period before agreeing the sacrifice.

What else should employers check before offering a scheme?

• Minimum wage. The sacrifice must not take cash pay below the minimum wage in any pay reference period; see salary sacrifice and the National Minimum Wage.
• Pension contributions. HMRC’s guidance says the employer decides whether pension contributions are based on the notional salary or the reduced cash salary, and should make this clear to the employee.
• Timing. EIM42760 requires the contract to be varied before the employee becomes entitled to the pay being given up. HMRC will want to see the variation and payslips before and after it.
• Emissions. Only cars at 75g/km or less get the favourable treatment. A higher emission car offered through the same scheme is taxed on at least the salary given up.

For how the scheme compares with paying a cash allowance instead, see car allowance or company car.

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Related Accountapedia entries

• Electric company cars: benefit in kind rates
• Reducing company car benefit with contributions
• Car fuel benefit charge
• Company car benefit in kind: how it is worked out
• The £2,000 cap on NI free pension salary sacrifice
• Is VAT due on salary sacrifice benefits
• Salary sacrifice technology schemes: the tax
• Buying extra holiday through salary sacrifice
• Employee car ownership schemes

Related cover: Employers' liability insurance is a legal requirement for most employers. Ask for a quote or call 01795 841 310.

Sources

• GOV.UK: Manual page EIM44060
• GOV.UK: Optional remuneration arrangements 480 appendix 12
• GOV.UK: Manual page EIM25261
• GOV.UK: Manual page EIM44131
• GOV.UK: Manual page EIM44105
• GOV.UK: Manual page EIM23900
• legislation.gov.uk: Act 2003 c. 1, section 139
• GOV.UK: Taxation of company cars the appropriate percentage for tax years 2025
• GOV.UK: Taxation of company cars the appropriate percentage for tax years 2028
• GOV.UK: Rates and thresholds for employers 2026 to 2027

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.