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.