If you’re considering salary sacrifice for an electric car, pension contributions, or other employee benefits, understanding how it’s taxed is crucial to working out your actual savings.
The tax treatment is simpler than you might think – and it’s designed to work in your favour.
The Basic Tax Principle
When you enter a salary sacrifice arrangement, you agree to reduce your gross salary (before tax) in exchange for a non-cash benefit. Because the reduction happens before income tax and National Insurance are calculated, you pay less on both.
Here’s the key point: you’re not taxed on the full original salary anymore. Your taxable income is lower, which means lower tax bills.
However, for most benefits, you’ll pay a small amount of tax back through something called Benefit-in-Kind (BiK) tax. Think of it as a tax on the value of the perk you’re receiving.
What You Save: Income Tax and National Insurance
The amount you save depends on your tax bracket.
Basic-rate taxpayers (earning £12,571–£50,270)
- Save 20% on income tax
- Save 8% on National Insurance
- Total saving: 28%
Higher-rate taxpayers (earning £50,271–£125,140)
- Save 40% on income tax
- Save 2% on National Insurance
- Total saving: 42%
Additional-rate taxpayers (earning over £125,140)
- Save 45% on income tax
- Save 2% on National Insurance
- Total saving: 47%
Let’s look at a practical example. If you’re a basic-rate taxpayer sacrificing £400 per month for an electric car, you save £112 per month (£400 × 28%) on tax and National Insurance contributions.
What You Pay: Benefit-in-Kind Tax
For most salary sacrifice benefits, you’ll pay BiK tax. This is where HMRC taxes the “benefit” you’re receiving from your employer.
BiK tax is calculated on a percentage of the benefit’s value, and that percentage varies dramatically depending on what you’re receiving.
For electric cars in 2026/27
The BiK rate is just 4% of the car’s list price (P11D value). This is incredibly low compared to petrol and diesel cars, which face rates of 25-37%. Here’s how it works:
- Take the car’s P11D value (list price including options)
- Multiply by 4% (the BiK rate for EVs in 2026/27)
- Multiply by your income tax rate (20%, 40%, or 45%)
- Divide by 12 for the monthly BiK tax
Example: A £35,000 electric car for a higher-rate taxpayer
- £35,000 × 4% = £1,400 (annual taxable benefit)
- £1,400 × 40% = £560 annual BiK tax
- £560 ÷ 12 = £47 per month
That’s all you pay back to HMRC for driving a brand-new £35,000 electric car. Compare this to a similar petrol car at 30% BiK, which would cost you £350 per month in tax.
Tax-Advantaged vs Taxable Benefits
Not all salary sacrifice schemes are taxed the same way. Some benefits are completely tax-exempt, whilst others are taxable.
Tax-advantaged benefits (no BiK tax)
- Pension contributions
- Cycle to Work scheme
- Employer-provided childcare
For these schemes, you simply save the income tax and National Insurance with nothing to pay back.
Taxable benefits (BiK tax applies)
- Electric cars (4% BiK in 2026/27)
- Technology schemes (taxable as a loan benefit)
- Gym memberships (taxable benefit)
- Private healthcare (taxable benefit)
Even with BiK tax, electric cars remain one of the most tax-efficient salary sacrifice options due to the exceptionally low 4% rate.
Important Salary Sacrifice Rules
1. National Living Wage protection
Your salary after sacrifice cannot drop below £12.71 per hour for those aged 21+ (from 1st April 2026). Employers must ensure this threshold is maintained.
2. Minimum commitment period
Some schemes require a 12-month minimum commitment. You’re entering into a contract variation with your employer, so you can’t simply opt out next month if circumstances change.
3. Impact on other benefits
Reducing your gross salary can affect:
- Mortgage applications (based on gross salary)
- Life insurance cover (if calculated on salary)
- Statutory sick pay (if you fall below the threshold)
- Pension contributions (if calculated as a percentage of salary)
Always consider these knock-on effects before committing.
How HMRC Collects the Tax
The beauty of salary sacrifice is that everything happens automatically through your payroll. Each month:
- Your employer deducts the sacrifice amount from your gross salary
- They calculate income tax and National Insurance on your reduced salary
- For benefits like company cars, they add BiK tax to your tax code
- Your payslip shows your reduced gross salary and lower tax deductions
You don’t need to do anything manually. You don’t need to fill out tax returns for salary sacrifice arrangements (unless you’re self-employed or have other reasons to complete one). It all happens seamlessly through PAYE.
The Savings Are Real!
Salary sacrifice taxation is designed to make benefits more affordable. For most employees:
- You save 28-47% on income tax and National Insurance
- You pay back a small percentage as BiK tax (currently 4% for EVs)
- Your net saving is typically 20-45% compared to buying the same benefit from your take-home pay
For electric cars through schemes like EZOO’s, the combination of low BiK rates and substantial income tax and National Insurance savings creates genuine value. You’re getting a brand-new car with everything included for roughly half what you’d pay personally.
Understanding the tax treatment helps you make an informed decision. The maths is simple: the savings are real, and the process is hassle-free.
Related guide: Does Salary Sacrifice Reduce Taxable Income?