Salary sacrifice car schemes: how the tax works in 2026/27

A salary sacrifice car scheme swaps part of an employee’s pay for a car. Whether that saves anything depends on one line in the Income Tax (Earnings and Pensions) Act 2003: for cars above 75 g/km of CO2, the employee is taxed on at least the pay given up, so the saving disappears. For electric cars and most plug-in hybrids the normal company car rules apply instead, and the 2026–27 benefit on an electric car is 4% of list price. This page quotes the legislation and HMRC’s guidance, works two examples with the current rates, and lists what else a sacrifice changes.

What a salary sacrifice arrangement is in law

The tax legislation calls these “optional remuneration arrangements” and defines two kinds. Section 69A ITEPA 2003:

• ““Type A arrangements” are arrangements under which, in return for the benefit, the employee gives up the right (or a future right) to receive an amount of earnings within Chapter 1 of Part 3.”
• ““Type B arrangements” are arrangements (other than type A arrangements) under which the employee agrees to be provided with the benefit rather than an amount of earnings within Chapter 1 of Part 3.”

Type A is the classic salary sacrifice: the employee gives up pay they were already entitled to. Type B catches the choice made up front — a job offer that says ‘a car, or this much more salary’ is caught even though no existing pay is reduced. A scheme that reduces an existing salary in exchange for a car is type A by that definition.

Two conditions sit around the contract. The first is the minimum wage: “A salary sacrifice arrangement must not reduce an employee’s cash earnings below the National Minimum Wage (NMW) rates. Employers must put procedures in place to cap salary sacrifice deduction and ensure NMW rates are maintained.” The second is permanence. “As a general rule, if an employee swaps between cash earnings and a non-cash benefit whenever they like, any expected tax and National Insurance contributions advantages under a salary sacrifice arrangement will not apply.” GOV.UK adds that “It may be necessary to change the terms of a salary sacrifice arrangement where a lifestyle change significantly alters an employee’s financial circumstances.”, naming marriage, divorce, a partner becoming redundant or pregnant.

The 75 g/km line

Most benefits provided through salary sacrifice lose their tax advantages. Section 228A switches off exemptions: “A relevant exemption does not apply (whether to prevent liability to income tax from arising or to reduce liability to income tax) in respect of a benefit or facility so far as the benefit or facility is provided pursuant to optional remuneration arrangements.” GOV.UK puts it plainly: “Exemptions on benefits in kind do not apply to salary sacrifice schemes.” Cycle to work, under “section 244 (cycles and cyclist's safety equipment)”, is one of the exclusions listed in s.228A(5).

Cars are handled separately, in section 120A. The pay given up replaces the normal benefit only when all three conditions are met:

1. “the car is made available to the employee or member of the employee's household pursuant to optional remuneration arrangements”,
2. “the total foregone amount in connection with the car for the tax year is is greater than the modified cash equivalent of the benefit of the car for the tax year (see section 121B)”, and
3. “the car's CO2 emissions figure (see sections 133 to 138) exceeds 75 grams per kilometre.”

Condition 3 is the one that shapes the market. A car at 75 g/km or less never meets it, so its benefit is always worked out under the normal rules, however much pay is given up. GOV.UK’s guidance for employers tells employers to value a benefit under a new arrangement at the higher of the salary given up and the normal benefit-in-kind charge, and then makes the exception:

The full percentage table, including the electric-range bands for plug-in hybrids, is on company car tax (BIK) rates, with a calculator.

Worked example 1: an electric car

Assume a £40,000 electric car and a sacrifice of £6,000 a year. These two figures are ours, for illustration; the rates are the published 2026–27 ones. The car is 0 g/km, so the taxable benefit is 4% of £40,000: £1,600.

The employer side: employer Class 1 at 15% is no longer due on the £6,000, which is £900; Class 1A at 15% is due on the £1,600 benefit, which is £240. GOV.UK: “The National Insurance Class 1A rate on expenses and benefits for 2026 to 2027 is 15%.”

The table compares tax and National Insurance only. Whether the scheme is good value also depends on the lease, insurance and maintenance prices inside the £6,000, which are commercial terms we have no published source for.

Worked example 2: a petrol car

Now a £30,000 petrol car at 120 g/km. Its appropriate percentage under s.139 is 30%, so the normal benefit is £9,000. The car is over 75 g/km, so s.120A compares that figure with the pay given up:

• Sacrifice of £6,000: the pay given up is lower than £9,000, so condition 2 is not met and the normal benefit of £9,000 is taxed. The employee pays tax on more than they gave up.
• Sacrifice of £10,000: the pay given up is higher, all three conditions are met, and the employee is taxed on £10,000. The pay has simply been converted into a benefit taxed at the same figure.

In both cases there is no income tax saving, which is the purpose of the rule. Employee National Insurance is still not charged on the sacrificed pay, but the employer pays Class 1A on the higher figure.

What else a salary sacrifice changes

Reducing contractual pay reduces everything calculated from it. GOV.UK lists the effects an employer should explain before an employee signs:

• Statutory pay. “Salary sacrifice can affect the amount of statutory pay an employee receives. It can cause some employees to lose their entitlement altogether.” “If a salary sacrifice arrangement reduces an employee’s average weekly earnings below the lower earnings limit, you don’t have to make any statutory payments to them.”
• Contribution-based benefits. “Salary sacrifice may affect an employee’s entitlement to contribution based benefits such as Incapacity Benefit and State Pension.”
• Pensions. “Often, employers will use a notional level of pay to calculate employer and employee pension contributions, so that employees who participate in salary sacrifice arrangements are not put at a disadvantage.” Whether the scheme does so is the employer’s decision and should be written down.
• Pay-related terms. Overtime rates, pay rises and bonuses can be based on the notional or the reduced salary, “but this must be made clear to the employee.”

On certainty, HMRC is explicit that it reviews schemes after the event, not before: “HMRC will not comment on a proposed salary sacrifice arrangement before it has been put in place.” What it would look for is “evidence of the variation of terms and conditions (if there is a written contract) payslips before and after the variation”.

Charging, insurance and the extras in the package

A lease car through salary sacrifice usually comes with insurance, servicing and sometimes a home charger. Section 120A(4) adds the pay given up for other benefits “connected with the car” into the total foregone amount, except a driver and fuel. For a car at 75 g/km or less that comparison never applies, so the extras do not change the 4% charge on an electric car.

On fuel, one line from HMRC’s 2026–27 rates page matters for electric cars: “Electricity is not a fuel for car fuel benefit purposes.” Providing electricity for an electric company car therefore does not create a car fuel benefit. Business mileage in a company car is reimbursed at the advisory fuel rates, which include an electric rate.

An employer’s checklist

• Vary the contract in writing; keep payslips from before and after.
• Cap the sacrifice so cash pay stays above the minimum wage, including for employees whose hours change.
• Decide and write down whether pension contributions use the notional salary.
• Say what happens on maternity leave, long-term sickness and leaving, and which lifestyle changes allow exit.
• Value the benefit correctly: over 75 g/km, compare the sacrifice with the normal benefit each year.
• Report the benefit and pay Class 1A at 15%.

How the car choice fits the rest of business travel

A salary sacrifice car is a company car for tax purposes, so business journeys in it are paid at advisory fuel rates rather than the mileage rates for private cars. Staff who use their own car remain grey fleet, with the health and safety checks that implies, and are paid under the HMRC mileage rates. Vans have their own flat-rate charges, set out on company van tax.

This page quotes legislation and HMRC guidance as read on 2026-10-02; it is not tax advice for a particular scheme.

Common questions