Salary sacrifice schemes are growing fast in the UK. The headline advantage is clear: you give up part of your gross pay in exchange for a benefit, and your taxable income goes down. But what does that mean in practice, and how does it affect tax, National Insurance, and overall earnings?

What Is Salary Sacrifice?

Simply put, a salary sacrifice scheme is an agreement between an employer and employee where you “sacrifice” a set portion of your gross pay in exchange for a non-cash benefit. Common examples include additional pension contributions, cycle-to-work schemes – or, increasingly popular, fully electric cars.

Because the deduction happens before tax and National Insurance (NI) are calculated, your gross taxable salary is reduced. This means less income tax and NI is due – making it a clever way to access perks while paying less.

How Salary Sacrifice Impacts Taxable Income

Your gross salary is the starting point for calculating income tax and NI contributions. So when that figure is reduced, everything else shifts.

For example, let’s say:

• Your gross salary is £60,000
• You sacrifice £6,000 per year for an EV scheme

This reduces your taxable income to £54,000. Income tax and employee NI are calculated on £54,000 instead of £60,000, meaning substantial savings for you.

Income Tax and National Insurance Savings

If you’re a higher-rate taxpayer:

• Income tax is 40% on income above £50,270
• Employee NI is typically 2% on income above the upper earnings threshold (and 12% below it)

By reducing taxable income by £6,000:

• You save £2,400 in income tax
• You save £120 in employee NI (2% of £6,000 above threshold)

Total direct savings: £2,520 per year

If you’re a basic-rate taxpayer (20%), the savings are still strong – £1,200 income tax plus £720 NI, totalling £1,920.

Employer Benefits: National Insurance and Payroll Efficiency

Employers also benefit from salary sacrifice:

• They no longer pay employer NI contributions on the sacrificed amount
• For £6,000 sacrificed, employer NI savings are typically 13.8% (i.e. £828 saved)

Do Salary Sacrifice Schemes Reduce Pension Contributions?

Reducing taxable income can technically reduce pension contributions – if those are tied to gross salary. However:

• Many employers protect pension calculations by using notional salary or reference salary (pre‑sacrifice)
• This ensures your pension contributions remain the same, regardless of the salary sacrificed.

Always check your employee benefits policy or ask your HR/payroll team to confirm how your pension is calculated.

EV Salary Sacrifice – Where Tax Efficiency Meets Sustainability

Electric car salary sacrifice schemes combine several advantages:

• Significant income tax and NI savings
• Very low Benefit-in-Kind (BiK) tax – just 3% in tax year 2025/26
• No upfront costs, no vehicle depreciation, and insurance / maintenance included
• CO₂ emissions savings and Clean Air Zone exemptions where applicable

When everything is bundled in, employees often pay significantly less than they would under a personal lease – and while also lowering personal and company carbon footprints.

Are There Limits or Disadvantages?

While salary sacrifice is beneficial, it’s not completely risk-free. Here are key considerations:

✔ Minimum Wage Compliance

Your reduced salary must still meet or exceed the national minimum wage. Employers must verify that salary after the sacrifice stays above the legal threshold.

✔ Mortgage and Lending

Since gross income is lower post‑sacrifice, lenders may view commitments less favourably – unless you can prove the reference salary is higher.

✔ Opt-Out Flexibility

Some schemes lock you in for a year or the length of a car lease. If your circumstances change – job loss, illness – you may still be liable for payments. With EZOO, there is early termination cover in case someone needs to end their lease early.

✔ Scheme Terms

Not all employers protect pensions or benefits with reference salary. Always check documentation to avoid surprises.

Tips for Employers Offering Salary Sacrifice

• Clearly explain how scheme works, and illustrate savings
• Use reference salary for pensions and benefits calculation
• Ensure salary after deduction stays above minimum wage
• Provide flexibility to opt-in/out or transfer in special circumstances
• Use providers like EZOO who manage the administration and compliance end-to-end

For more information, head to this page: Salary sacrifice for employers.

Salary Sacrifice is a Financially Smart Perk

So – does salary sacrifice reduce taxable income? Yes, decisively. By shifting part of your gross remuneration into a non-cash benefit (like a fully electric car), your taxable earnings drop, cutting your income tax and National Insurance contributions significantly.

When structured well – with protections for pensions and benefits – salary sacrifice becomes a financially smart, environmentally responsible and employee-friendly perk. Electric car schemes packaged this way offer a win-win: low-cost, brand-new EV driving, plus tax savings and sustainability credentials – all without upfront personal expenditure.

The UK’s electric vehicle landscape is experiencing a remarkable transformation. 

Recent market data reveals that the newly introduced Electric Car Grant (ECG) has catalysed a 44% surge in EV enquiries, whilst the price gap between electric and petrol vehicles continues to narrow at an impressive rate.

The Numbers Tell a Compelling Story

According to the latest research from Autotrader, consumer interest in electric vehicles has jumped dramatically since the grant’s launch. More significantly, enquiries for grant-eligible models have more than doubled, demonstrating just how responsive British drivers are to meaningful financial incentives.

The affordability gap – long cited as the primary barrier to EV adoption – is closing faster than many predicted.

The average price premium for electric vehicles has fallen to just 19%, down from 29% only a year ago. This represents a significant milestone in making electric motoring accessible to more families and businesses across the UK.

Why the Shift is Happening Now

Several factors are converging to create this perfect storm of EV adoption:

• Government Support: The Electric Car Grant provides discounts of up to £3,750 on qualifying models priced under £37,000, making affordable EVs more attractive without subsidising luxury vehicles.
• Manufacturer Response: Car makers have been quick to adjust their pricing strategies to meet the grant eligibility criteria, creating even more options for consumers in the accessible price bracket.
• Market Maturity: Used EV prices have stabilised after previous volatility, whilst electric models have remained the fastest-selling fuel type for three consecutive months, averaging just 27 days from listing to sale.

Beyond the Showroom: The Broader Impact

The grant’s influence extends beyond individual car buyers. Industry analysts suggest the scheme is reshaping how manufacturers approach the UK market, with many adjusting their model line-ups and pricing strategies to ensure eligibility.

Used EV enquiries have also benefited from the renewed interest, with one in six used car enquiries now relating to electric vehicles – a dramatic increase from just 2% in 2020. This suggests the grant is having a “halo effect” across the entire electric vehicle market, not just new cars.

Infrastructure Keeps Pace

One concern that’s rapidly becoming outdated is “range anxiety“. The UK now boasts over 85,000 public charging points, with a new charger being added approximately every 31 minutes. This expanding infrastructure, combined with improving battery technology, means electric vehicles are increasingly practical for drivers across all regions.

What This Means for UK Drivers

The convergence of government support, competitive pricing, and robust infrastructure is creating ideal conditions for electric vehicle adoption.

For consumers who have been sitting on the fence, the combination of reduced upfront costs and lower running expenses – EV drivers can save up to £1,500 annually on fuel and running costs compared to petrol vehicles – makes the switch increasingly attractive.

For businesses, the current environment presents opportunities to support employees interested in electric vehicles, whether through salary sacrifice schemes, company car policies, or simply providing workplace charging facilities.

The data suggests we’re witnessing a genuine turning point in the UK’s automotive market. Electric vehicles are no longer a future aspiration – they’re becoming the practical choice for growing numbers of British drivers.

More drivers than ever are considering switching to zero-emission motoring.

However, one question that frequently arises when weighing up the benefits of going electric is whether EV insurance costs more than traditional petrol or diesel car cover.

The short answer? Yes, electric vehicle insurance is typically more expensive – but there’s more to it than you might expect.

The Current State of Electric Vehicle Insurance Costs

The average cost of EV car insurance is around £654 for the most popular electric car models in the UK, according to recent analysis by NimbleFins. However, premiums are highly variable from one car to the next, with quotes ranging from around £400 to over £1,000 per year for our test driver.

Different comparison sites report varying figures, highlighting how much insurance costs can differ depending on your circumstances. 

But here’s the key point: These costs only matter if you’re buying insurance separately.

Skip the Insurance Hassle Entirely with EZOO

Why worry about electric vehicle insurance costs when you don’t have to deal with them at all?

At EZOO, we’ve eliminated the insurance headache completely. When you choose one of our EV lease deals or salary sacrifice schemes, comprehensive insurance is included as standard – meaning you’ll never need to shop around, compare quotes, or worry about annual renewals and price increases.

The EZOO Advantage

• No Insurance Shopping Required: Forget spending hours on comparison websites or dealing with insurance brokers. Your cover is sorted from day one.
• Fixed Monthly Costs: Instead of facing unpredictable insurance renewals that can increase by hundreds of pounds, your insurance cost is built into your predictable monthly lease payment.
• Comprehensive EV Coverage: Our insurance packages include all the specialist electric vehicle features you need – charging cable cover, battery protection, and breakdown recovery to charging points.
• Tax-Efficient Payments: Through salary sacrifice, your lease payments (including insurance) come from your gross salary, potentially saving you thousands in tax and National Insurance.
• Zero Upfront Costs: No need to find a lump sum for annual insurance premiums – everything is spread across affordable monthly payments.
• Professional Claims Handling: Benefit from fleet-grade insurance with dedicated support, rather than dealing with consumer insurance call centres.

With EZOO’s inclusive approach, the question isn’t “how much more will EV insurance cost me?” but rather “how much will I save by not having to deal with insurance at all?”.

Why Electric Vehicle Insurance Costs More

Higher Purchase Values and Replacement Costs

Electric cars typically have a higher initial purchase price than equivalent petrol models, which often translates to higher insurance premiums. When an insurer calculates your premium, the value of your vehicle is a key factor – quite simply, a more expensive car costs more to replace if it’s written off or stolen.

Battery Technology and Replacement Costs

One of the most significant factors affecting EV insurance costs is the battery pack. The lithium-ion battery pack in an electric car can account for up to two-thirds of the vehicle’s value. If the battery is damaged beyond repair, replacement costs can be substantial, often running into tens of thousands of pounds.

Specialised Repair Requirements

Not every mechanic can work on EVs; a specific qualification is needed. This may incur a higher repair cost. The limited number of qualified technicians means repair times can be longer, and labour costs higher.

However, it’s worth noting that EVs generally have fewer moving parts than traditional vehicles and tend to require less frequent maintenance overall, with electric motors proving more reliable than conventional combustion engines.

Parts Availability and Cost

Electric vehicles use specialised components that can be more expensive and harder to source than conventional car parts. Since EVs are newer, they are more expensive to repair, and the parts harder to get hold of. Software is also more technical to repair.

Limited Historical Data

Insurance premiums are typically based on historical claims data, but electric vehicles haven’t been on UK roads long enough to build comprehensive databases. This uncertainty often leads insurers to price policies more conservatively, resulting in higher premiums.

Special Insurance Features for Electric Vehicles

Many insurers now offer EV-specific policies with additional features that traditional car insurance doesn’t include:

• Charging Equipment Cover: Protection for charging cables, wallbox home chargers, and adaptors against theft, damage, or fire.
• Battery Cover: Comprehensive protection for the vehicle’s battery pack, even if it’s leased separately from the car.
• Breakdown Recovery: Specialist recovery services if your EV runs out of charge, including transport to the nearest charging point.
• Over-the-Air Updates: Coverage for software updates that are delivered remotely to your vehicle.

Factors That Affect Your Electric Vehicle Insurance Premium

Like any car insurance, EV premiums are influenced by numerous personal and vehicle-related factors:

• Your Age and Experience: Young and inexperienced drivers typically pay more, regardless of whether they drive electric or petrol vehicles.
• Driving History: A clean driving record with no claims or convictions will help keep costs down.
• Annual Mileage: Higher mileage typically means higher premiums as insurers perceive greater accident risk.
• Location: Urban areas with higher traffic density and crime rates generally result in higher premiums.
• Security Measures: Having a garage or secure parking can reduce costs, as can additional security features like alarms or immobilisers.
• Occupation: Certain professions are considered higher risk by insurers.

Ways to Reduce Your Electric Vehicle Insurance Costs

Despite higher baseline costs, there are several strategies you can employ to keep your EV insurance affordable:

• Shop Around: Different insurers price electric vehicle risk differently, so comparison shopping is essential.
• Consider Higher Excesses: Agreeing to pay a higher excess can significantly reduce your premium.
• Improve Security: Parking in a garage or on a private driveway can lower costs.
• Bundle Policies: Some insurers offer discounts if you have multiple policies with them.
• Build No-Claims Bonus: Maintaining a clean claims record will help reduce future premiums.
• Choose Your Vehicle Wisely: Some electric vehicles are much cheaper to insure than others.

Making the Switch: Is It Worth It?

The slightly higher insurance costs shouldn’t deter you from considering an electric vehicle. As the technology matures and becomes more mainstream, insurance costs are expected to continue falling.

The environmental benefits, lower running costs, and increasingly impressive range and performance of modern electric vehicles make them an attractive proposition for many drivers.

Salary sacrifice schemes are growing in popularity – particularly those that let employees drive brand-new electric cars for less.

While tax savings and zero-emission perks are often front and centre, many employees (and employers) have a more practical question: Does salary sacrifice affect pensions?

The short answer? Yes, it can – but not always in a negative way. The longer answer depends on how your pension is structured, how your employer manages contributions, and what kind of scheme you’re in.

What Is Salary Sacrifice? (Quick Refresher)

Salary sacrifice is a government-approved arrangement where an employee gives up part of their gross salary in exchange for a non-cash benefit. That might be additional pension contributions, a cycle-to-work scheme, or – as is increasingly common – a fully electric car.

Because the deduction comes from gross salary, before tax and National Insurance are applied, employees pay less tax and less National Insurance.

When it comes to electric car salary sacrifice, the result is that employees can drive a brand-new EV for significantly less than they’d pay via a personal lease – often saving 30–60% overall.

How Salary Sacrifice Affects Pensions

This is where it gets slightly more complex. By reducing your gross salary, salary sacrifice can, in some cases, also reduce:

• The amount of money you contribute to your pension
• The amount your employer contributes, depending on the scheme rules

That said, most responsible employers put safeguards in place to make sure your pension contributions are protected.

Types of Pension Contributions

There are two main types of pension contributions to be aware of:

1. Percentage-Based Contributions

Most workplace pensions calculate contributions as a percentage of your gross salary. For example:

• You contribute 5% of salary
• Your employer contributes 3%

If your gross salary drops because of salary sacrifice, and the contributions are tied to that reduced salary, your pension contributions could be slightly lower.

2. Reference or Notional Salary Contributions

Many employers now calculate pension contributions based on your pre-sacrifice salary (also known as “reference salary” or “notional salary”). This ensures your pension contributions remain the same, even if you opt into a salary sacrifice scheme.

This is often referred to as “salary sacrifice with pension protection” and is considered best practice, especially for large employers.

Do All Employers Protect Pension Contributions?

Not automatically. While many employers do protect pensions within salary sacrifice arrangements, it’s not a legal requirement unless specified in the contract or policy.

Employees should:

• Check their employment contract or HR policies
• Ask HR or payroll whether pensions are based on actual or notional salary
• Get written confirmation before signing up to a scheme

At EZOO, we recommend that businesses offering salary sacrifice schemes work with providers (like us) who understand these nuances and can help employers build a fully compliant and employee-friendly policy.

Other Benefits That May Be Affected

Because salary sacrifice reduces your official gross salary, it can also influence:

• Death in service benefits
• Redundancy calculations
• Mortgage or loan applications
• State benefits eligibility

However, again, many employers use reference salary to assess other benefits, mitigating any impact.

The best practice? Treat salary sacrifice as a total rewards strategy, not just a one-off benefit. Consider how it aligns with your broader employee benefits package, including pension, insurance, bonus schemes, and more.

Why Salary Sacrifice Is Still a No-Brainer for EVs

Even with a potential reduction in pension contributions (which can be avoided with good scheme design), salary sacrifice remains one of the most tax-efficient ways to drive. Why?

• You save on income tax and National Insurance
• Your employer often shares their NI savings with you
• You avoid big upfront costs associated with leasing or buying
• You pay low benefit-in-kind tax (just 3% in 2025/26 for BEVs)
• You drive a brand-new EV without the hassle of insurance, servicing, or depreciation worries

With the cost-of-living still high and more people thinking long-term about both money and the planet, EV salary sacrifice is a smart way to do both.

Tips for Employers Offering Salary Sacrifice Schemes

• Communicate clearly with staff about how pensions and benefits are affected
• Use notional salary as the basis for pension and death-in-service benefits where possible
• Offer guidance or bring in a benefits provider who can explain the full package
• Partner with providers who offer flexible, compliant solutions with minimal admin

Salary sacrifice should never leave employees worse off in the long run – when managed well, it becomes a powerful, future-forward part of your employee value proposition.

Keep Your Pension On Track

So, does salary sacrifice affect pensions? Technically, yes – it can reduce pension contributions if based on the post-sacrifice salary. But in reality, most employers either protect pensions using notional salary or can easily set up schemes that do.

The key takeaway? Salary sacrifice doesn’t have to come at the cost of your retirement savings. With the right setup, you can drive a new electric car, cut your tax bill, and keep your pension on track – all at the same time.

Frequently Asked Questions

For businesses of all shapes and sizes, access to vehicles is often essential – but owning a company fleet outright can be expensive, time-consuming, and inefficient. That’s where business vehicle leasing comes in.

Whether you’re a growing start-up or a nationwide enterprise, leasing gives your business access to the latest cars – including fully electric vehicles – without the large upfront costs or long-term depreciation risks.

What Is Business Car Leasing?

Business car leasing is a way for companies to access vehicles without owning them outright. Instead of purchasing a car (and tying up capital), you rent it over a fixed term – usually 2 to 4 years – paying a monthly fee. At the end of the contract, the vehicle is returned, and you can start a new lease if needed.

It’s essentially long-term vehicle hire, designed to reduce financial risk and provide flexibility.

How Does It Work in Practice?

Here’s a step-by-step look at a typical business leasing process:

1. Choose a Vehicle

With EZOO, you’ll have access to a wide range of EVs to suit different business needs. When supplying from our own fleet, we can often get vehicles out to businesses in as little as 7 days.

2. Sign a Business Lease Agreement

You enter into a lease contract – often referred to as Business Contract Hire (BCH). This outlines the vehicle, term, mileage allowance, and monthly cost.

With EZOO, lease terms are flexible – starting from just 3 months (the shortest in the UK), making it ideal if you’re trialling EVs for your team or simply waiting for a new car to be delivered.

3. Make Monthly Payments

Your company pays a fixed monthly fee for the use of the vehicle. With EZOO, road tax (VED) and maintenance are included in this fee.

4. Return the Vehicle at the End of the Lease

Once the term ends, you return the car (provided it’s in fair condition and within the mileage limit). You can then lease a new vehicle, extend the lease, or walk away.

5. No Worries About Depreciation or Selling

Since you don’t own the car, you don’t need to worry about its resale value – making cash flow and planning much easier.

Types of Business Leasing

There are a few variations of business leasing in the UK:

• Business Contract Hire (BCH): The most common option. You lease the vehicle for a fixed term with fixed monthly payments. Great for VAT-registered businesses and low-risk budgeting.
• Finance Lease: You pay a monthly cost and a balloon payment at the end, and the vehicle is sold to a third party. More suitable for businesses that want some control over resale.
• Business Car Subscription: A more flexible, all-inclusive option. Pay monthly with no long-term tie-in – includes maintenance, insurance, and more.
• Electric Car Salary Sacrifice: Technically not a business lease, but worth including. Employers lease the car and employees drive it through a tax-efficient salary deduction.

Why Lease Instead of Buy?

Leasing offers several business advantages over purchasing:

• Preserve Cash Flow: No large upfront payments – capital can be used elsewhere in the business.
• Predictable Costs: Fixed monthly fees simplify budgeting.
• Tax Efficiency: Lease payments can often be claimed as a business expense.
• VAT Benefits: If you’re VAT-registered, you can reclaim up to 100% of the VAT on a commercial lease (and 50% on personal use vehicles).
• No Depreciation Risk: Avoid the hassle of selling a depreciating asset.
• Access to the Latest EVs: Refresh your fleet every few years, with cutting-edge electric vehicles and safety tech.

Why Are Electric Vehicles So Popular To Lease?

With the shift towards net zero and tighter emissions rules, more businesses are switching to electric vehicle leasing. It’s a smart move – and leasing EVs often makes more sense than owning them outright. Here’s why:

• Lower Benefit-in-Kind (BiK) tax: Just 3% in 2025/26, compared to 16–37% for petrol/diesel vehicles. Please note that the BiK for EVs will continue to increase annually until at least 2029.
• Cheaper running costs: Electricity is cheaper than fuel, and EVs have fewer moving parts to maintain.
• Sustainability credentials: Improve your ESG ratings and reduce your company’s carbon footprint.
• Flexible EV subscriptions and salary sacrifice options: With EZOO, you can access EVs in ways that suit modern, agile businesses.

Are There Any Risks or Downsides?

Leasing is low-risk, but there are a few things to consider:

• Mileage limits: Exceeding them can lead to excess mileage charges.
• Wear and tear: You’ll be expected to return vehicles in fair condition.
• Early termination fees: If you end a lease early, there may be a penalty.
• VAT complexity: If vehicles are used for both business and personal travel, VAT recovery rules apply.

Choosing the right partner (like EZOO) can help you manage these issues effectively – with tailored guidance and flexible terms.

How EZOO Does It Differently

EZOO’s approach to business EV leasing is designed for modern businesses:

• Electric and hybrid vehicles: Focused on the vehicles of the future, not the past
• Flexible plans: From long-term leasing to short-term 3-month subscriptions (the shortest in the UK!)
• All-inclusive monthly price: Covering insurance, servicing, 24/7 breakdown cover, road tax, and maintenance.
• Low admin: We manage the setup, paperwork and onboarding
• Employee-friendly: Salary sacrifice schemes that save money and attract talent

Whether you’re looking to electrify your fleet or roll out a low-emission perk for your team, EZOO gives you the tools, cars and support to do it seamlessly.

Lease Your Fleet Today

Business car leasing is a smart, cost-effective way to run a company fleet – especially as more organisations go electric. It allows businesses to access the latest vehicles without the capital outlay or risks of ownership, while unlocking tax advantages and predictable costs.

From traditional business leases to all-in EV subscriptions and salary sacrifice schemes, there’s never been a better time to rethink how your business uses vehicles. With the right partner, leasing isn’t just a finance option – it’s a strategy for sustainability, flexibility, and growth.

Frequently Asked Questions