A salary sacrifice EV scheme lets your employees drive a new electric car using pre-tax salary, while you as the employer reduce your National Insurance contributions bill. The scheme can be set up at zero net cost to the business and takes around four to eight weeks to launch. With the BIK rate for electric cars at 4% in 2026/27 and the ZEV mandate accelerating the industry’s transition to EVs, there has never been a better time to offer it.
This guide walks you through everything an employer needs to know: how the scheme works, the financial benefits, legal requirements, risks to manage, and how to choose a provider.
Key Takeaways
- A salary sacrifice EV scheme can be set up at zero net cost to the employer, with NI savings offsetting administration costs.
- For every employee on the scheme, you save 15% employer NI on the sacrificed salary — saving around £900/year on a £6,000 salary sacrifice.
- The BIK rate for electric cars in 2026/27 is 4% — employees pay far less tax than through a traditional company car or car allowance.
- Early termination risk (if an employee leaves before the lease ends) can be managed through “complete employer protection” packages offered by most providers.
- The scheme requires a formal employment contract variation for each participating employee and must not reduce pay below National Minimum Wage.
How a Salary Sacrifice EV Scheme Works
In a salary sacrifice scheme, an employee agrees to reduce their gross salary by an amount equal to the monthly lease cost of an electric car. In return, you (the employer) lease the car and make it available to the employee as a benefit.
Because the sacrifice happens before income tax and National Insurance are calculated:
- The employee pays income tax and NI on a lower salary
- You pay employer NI on a lower payroll figure
- The BIK charge on the electric car (4% of P11D value in 2026/27) is the only tax the employee pays on the car itself
The net result is that the employee gets a brand-new electric car at a significantly lower true cost than buying or leasing independently.
Employer Financial Benefits
National Insurance savings
For every £1 of salary sacrificed, you save 15% in employer NI. On a scheme where an employee sacrifices £500 per month (£6,000 per year), your NI saving is approximately £900 per year.
With 20 employees on the scheme, that saving reaches £18,000 per year — often enough to cover all administration and scheme management costs with headroom left over.
Reduced gross payroll cost
Because sacrifice reduces the employee’s gross pay, your total payroll cost falls even as the employee’s net take-home remains broadly similar. This is one reason why many employers view salary sacrifice as genuinely cost-neutral or cost-positive.
Talent attraction and retention
Offering a well-structured EV salary sacrifice scheme is increasingly a competitive differentiator in recruitment, particularly for roles where candidates compare benefits packages carefully. Many employees now specifically seek out employers who offer the scheme.
Employee Financial Benefits
The employee’s benefit is even more significant than the employer’s. Consider a higher-rate taxpayer (40%) who wants a £45,000 electric car:
Without salary sacrifice (personal lease): Full lease cost of ~£600/month from net salary, plus no tax relief on the monthly payment.
With salary sacrifice (at 40% tax + NI):
- Gross sacrifice: ~£600/month
- Income tax saving (40%): £240/month
- Employee NI saving (8%): £48/month
- Net cost before BIK: ~£312/month
- BIK tax (£45,000 × 4% × 40% / 12): ~£60/month
- Total net monthly cost: ~£372/month
The saving is approximately £228 per month versus taking a personal lease — and the employer handles insurance, VED, and maintenance if those are included in the lease package.
Legal Requirements and Compliance
National Minimum Wage (NMW)
The single most important compliance requirement: salary sacrifice must not reduce an employee’s cash pay below the National Minimum Wage. Before enrolling any employee, check that their post-sacrifice salary remains at or above NMW.
For part-time workers, hourly-wage employees, or those close to NMW, the scheme may not be suitable. Most providers include NMW checks as part of their onboarding process.
Contract variation
Each employee who joins the scheme must sign a formal variation to their employment contract. This variation:
- Reduces their contractual salary by the sacrifice amount
- Specifies the duration (typically tied to the lease term: 24 or 36 months)
- Confirms the employee’s obligations if they leave before the lease ends
The variation is a legal document — it is worth having your employment solicitor review the template provided by your chosen scheme provider.
HMRC compliance
HMRC treats the car as a benefit in kind. You must report the BIK on your employees’ P11D forms (or via payrolling of benefits) at the end of each tax year. Your payroll system must reflect the salary reduction and any adjustments to the employee’s tax code.
Auto-enrolment and pensions
Salary sacrifice reduces the employee’s pensionable pay, which in turn can reduce pension contributions for both employee and employer if the scheme is contribution-rate-based. Some employers make a compensating pension contribution to avoid reducing the employee’s pension accrual. Review this with your pension provider before launch.
Managing Early Termination Risk
The employer leases the car and sublets it to the employee. If the employee leaves before the lease ends, the employer remains responsible for the outstanding lease payments.
This is the most significant financial risk in running a salary sacrifice scheme. Options for managing it include:
1. Complete Employer Protection (CEP): most reputable scheme providers offer this as a standard or optional add-on. It covers the remaining lease payments if an employee leaves due to resignation, redundancy, or extended leave, typically from the first day of the scheme. This is the recommended approach for most employers.
2. Employee deposit or bond: some employers require a modest deposit (typically one or two monthly rentals) from the employee, held against early termination. Less common and administratively complex.
3. Scheme eligibility criteria: limiting the scheme to permanent employees with a minimum tenure reduces (but does not eliminate) early termination risk.
Choosing a Salary Sacrifice EV Scheme Provider
The market has several well-established providers. Look for:
- Scheme management software: an employee portal where staff browse vehicles, run their own savings calculations, and manage their scheme participation
- Lease arrangements: access to a broad range of manufacturers and models, not a limited list
- Complete Employer Protection: essential for managing early termination risk
- Payroll integration: direct compatibility with your payroll software reduces administration burden
- Support: dedicated account management for employers, not just a call centre
Providers active in the UK market include Octopus Electric Vehicles, LoveElectric, Fleet Alliance, and others. Compare their scheme terms and provider fees before committing.
How to Set Up the Scheme: Timeline
| Week | Action |
|---|---|
| 1—2 | Choose a provider; review their scheme terms and contract templates |
| 2—3 | Brief your HR, payroll, and finance teams; review NMW positions for all employees |
| 3—4 | Sign employer agreement with provider; configure payroll integration |
| 4—5 | Communicate the scheme to employees; provide savings calculator access |
| 5—6 | Employees select vehicles; process contract variations |
| 6—8 | Vehicles ordered; delivered within manufacturer lead times |
| Ongoing | Process BIK reporting via payroll; manage renewals and early terminations |
Salary Sacrifice and the Employer’s P11D Obligations
As the employer, you are responsible for reporting the car benefit to HMRC. This is done via P11D forms submitted after 5 April each year, or through payrolling of benefits where the BIK is included in the employee’s monthly pay calculation.
The benefit value reported is the P11D value of the car multiplied by the BIK appropriate percentage (4% in 2026/27 for zero-emission vehicles). Your employees pay income tax on this amount through their PAYE code.
You also pay Class 1A NI (15%) on the benefit value reported — but this cost is far lower than the employer NI you were paying before on the equivalent cash salary, because the BIK value (4% of P11D) is much smaller than the salary you are no longer paying NI on.
Frequently Asked Questions
How much does it cost an employer to set up a salary sacrifice EV scheme? Most providers offer setup at zero cost to the employer. Their revenue model is typically a per-vehicle monthly management fee or a margin built into the lease rate. Once the NI savings are factored in (15% of the sacrificed salary per employee), most employers find the scheme is either cost-neutral or generates a net saving from the first vehicle onwards.
Can employees choose any electric car? This depends on your provider and your fleet policy. Most providers give access to a wide range of makes and models, subject to a monthly rental cap or a list price cap you set as the employer. You can restrict the list to specific manufacturers or models if needed.
What happens if an employee on salary sacrifice is made redundant? Without Complete Employer Protection, you remain liable for the outstanding lease payments. With CEP, the provider absorbs the cost. This is why CEP is strongly recommended before any employee joins the scheme.
Can we offer salary sacrifice alongside a traditional fleet? Yes. Many employers run both. The salary sacrifice scheme typically extends access to employees who are not on the traditional fleet policy, such as those without company car entitlement in their contracts.
For employees considering their options, see our salary sacrifice electric car guide for employees.