Up until a few years ago, company cars were on the decline due to dwindling tax benefits and rising costs. But with generous incentives on low-emission vehicles, company cars have become more accessible again. It’s good news, but it’s essential to understand the tax implications for both the employer and employee.
Company car tax on petrol/diesel cars is calculated on the higher of the salary sacrificed or the Benefit in Kind value (based on emissions, list price and fuel type). This makes electric vehicles the most cost-efficient option, particularly when combined with the Income Tax and NIC savings made through a salary sacrifice car scheme.
This article explains how salary sacrifice car schemes work, how BiK rates are due to change, and what the employer and employee benefits are.
At Approved Accounting, we help businesses make tax-efficient decisions on employee benefits to help them attract talent and manage costs. If you need advice on tax for company cars or any other type of benefits scheme, please get in touch.
How do salary sacrifice car schemes work?
In a salary sacrifice agreement, an employee gives up part of their gross salary in return for access to a car that is financed by the employer. The deduction is taken from the pre-tax salary before income tax and National Insurance contributions are applied, which means both employees and employers pay less tax.
Most employers have a contract hire agreement for company cars through a leasing company.
The monthly cost typically includes:
- Road tax (due on electric cars since April 2025)
- Maintenance and insurance elements
- Replacement tyres
- Breakdown cover
This gives employees access to a brand-new car without upfront costs or credit checks, which can be a very attractive package.
Fuel isn’t included in salary sacrifice schemes, as it is a separate taxable benefit, and is often not worth it. For EVs, some schemes are starting to introduce perks like access to public charging networks at discounted rates.
Are company cars a Benefit in Kind (BiK)?
Any company car used for private journeys (which includes driving to and from work) counts as a Benefit in Kind. Both employees and employers pay BiK tax on company cars.
The BIK value is assigned based on the car’s list price, carbon dioxide emissions (g/km) and fuel type. Favourable BIK tax rates for zero-emission electric cars are set to continue, with only modest increases in the next three years.
How are salary sacrifice schemes taxed?
The tax treatment for company cars depends on the type of vehicle, as set out in the Optional Remuneration Arrangement (OpRA) rules introduced in 2017:
- For diesel or petrol cars, employees are taxed on the higher of:
- The car’s Benefit in Kind (BIK) value (the vehicle’s P11D value x BIK rate x Income Tax rate)
- The gross salary sacrificed
- For ultra-low emission vehicles (ULEVs) and electric cars, only the BIK value applies.
Example comparison on the BiK employees’ pay:
- Brand new, zero-emission EV £35,000 (P11D value) x 3% BIK rate x 20% (tax band) = £210 per year
- Petrol car £35,000 (P11D value) x 24% BIK rate x 20% (tax band) = £1,680 per year
The benefits of salary sacrifice schemes
Employee benefits
- Tax benefits: Pay less income tax and lower National Insurance contributions.
- Cost efficiency: 30–40% savings compared with personal leasing (see example below).
- Budget planning: Fixed monthly payments covering all motoring essentials.
- No upfront costs: No deposit or credit check required.
Example based on a £40,000 salary and a zero-emission EV with a value of £40,000
| Salary sacrifice amount: | £500 per month (£6,000 per year) |
| Tax and NIC saving: | 20% income tax and 8% employee NIC = £1,680 per year. |
| BiK tax | £40,000 x 3% (BiK) x 20% (Income Tax rate) = £240 per year |
| Net cost to employee: | £6,000 – £1,680 + £240 = £4,560 (£380 per month) |
| Compared to a typical personal lease (£600 per month): | £7,200 – £4560 = £2,640 saving per year (~36%) |
Employer benefits
- Tax savings: Reduced National Insurance liabilities.
Based on the example above, it equates to £900 per year, minus £180 Class 1A NIC due on the BiK = £720 per year) - Talent attraction and retention: Offering a salary sacrifice car is seen as a desirable perk, particularly with the rising adoption of electric vehicles.
- Sustainability goals: Supporting the shift to low-emission vehicles shows your company takes their corporate responsibility seriously.
- Employee engagement and retention: Money-saving benefits like these make employees feel valued, boosting motivation and loyalty.
Employer responsibilities and costs
Employers offering company cars or salary sacrifice arrangements must comply with HMRC rules.
They must:
- Report benefits to HMRC and apply BIK charges correctly
- Pay employers’ National Insurance Contributions on the taxable benefit
- Ensure no employee’s reduced pay falls below the National Minimum Wage
- Manage lease payments and related administration
Many business owners find that the services of an experienced accountant can help them manage these obligations without undue stress or effort.
Other key considerations for business owners
If you’re looking to introduce or expand a salary sacrifice scheme for your employees, it’s essential to consider the following:
Pensions and wider financial benefits
When entering into a salary sacrifice arrangement, your employees must understand the knock-on effects of reducing their take-home pay.
A lower salary will result in lower workplace pension contributions, as they are calculated as a percentage of gross earnings. It may also affect the employee’s eligibility for statutory benefits like maternity pay. A lower reported income will also affect how lenders assess their affordability for a mortgage.
As a responsible employer, it’s essential that you communicate these implications before committing.
Vehicle type
As shown above, electric and low-emission cars attract the lowest BIK rates and can represent a significant saving over petrol/diesel cars – up to as much as 34%.
Employer costs
It’s important to weigh up the vehicle lease payments and National Insurance savings with recruitment and retention costs, to ensure the scheme is worthwhile. An experienced tax accountant can help you look at the numbers to see if it will benefit the business.
Looking for tax guidance and business advice?
Deciding between a salary sacrifice arrangement and a traditional company car scheme requires careful consideration of tax rules, employee expectations, and long-term business costs. At Approved Accounting, we help businesses weigh up these types of decisions against short-term profitability and long-term goals.
Get in touch if you need help establishing a tax-efficient benefit scheme that attracts talent and boosts retention.
Frequently Asked Questions – tax implications of company cars and salary sacrifice schemes
Do I pay less tax with a salary sacrifice car scheme?
If you commit to a car salary sacrifice scheme, your salary is reduced before income tax and National Insurance are deducted, giving you immediate savings. However, you will pay BiK tax based on the type of vehicle and your personal tax rate, so it’s important to calculate the savings versus the cost. The BiK rate is minimal for brand-new electric cars compared to diesel/electric, presenting a much bigger benefit.
Remember that a lower salary will result in a lower workplace pension contribution and may affect your eligibility for state benefits like statutory maternity pay. It may also affect your mortgage affordability, so it’s important to consider the costs versus the benefits.
Can I choose any car for a salary sacrifice scheme?
Choice is usually limited to vehicles offered by the leasing company and approved by the employer. Ultra-low-emission vehicles have the greatest tax advantages, giving employers a great incentive to go electric.
How are fuel benefits taxed?
If employers pay for private fuel, this is a separate taxable benefit. The charge is based on a fixed HMRC multiplier and the car’s BiK rate. For many, it’s cheaper to pay directly for private fuel.
Do I pay BiK tax if I only use a company car for work?
If you use a company car only for business journeys and never for personal use (including getting to and from work), it might not be subject to BIK tax. But HMRC does have strict rules on tax, so you must be able to provide evidence.
