Salary sacrifice vs business leasing - which car scheme is best for your business?

It may not be a surprise to learn that most employees (73%) want cash saving benefits that they can access through their employer.

A car scheme is one way to give this. Let’s dive into the three big choices employers consider: salary sacrifice, business contract hire, and car allowances.

Salary sacrifice is a cost-free employee benefit that allows staff to lease a brand-new electric vehicle by giving up a portion of their gross salary. Because this comes out before tax, they save on Income Tax and National Insurance – cutting up to 40% off the cost of their EV – while your business saves on National Insurance too.

Business contract hire (BCH), on the other hand, offers companies a simple way to lease EVs for a fleet. The leases are held by your business, not individual employees, so vehicles can be reassigned and managed centrally.

Many companies still provide car allowances – extra salary given to employees to fund a vehicle. But allowances are taxed like ordinary pay, which makes them less efficient than salary sacrifice.

For example:

• With a car allowance, the employee uses taxed income to pay for a lease or finance deal.
• With salary sacrifice, the same employee gets the car from gross salary, saving thousands in tax and NI.

That’s why many businesses move away from car allowances toward salary sacrifice. Employees can still receive a car allowance and use it as part of their salary sacrifice contribution – but they’ll save more and often get access to a wider choice of cars than a traditional company car scheme would allow.

The main difference? Salary sacrifice is tied to an individual employee’s lease, while business contract hire is a flexible lease held by the employer. BCH gives the company control, while salary sacrifice gives employees a cost-effective personal benefit.

But crucially: they can work together. Many businesses keep BCH for roles that require a pooled or needs-based company car, while offering salary sacrifice to the wider workforce. This broadens your benefits package and gives everyone a chance to go electric.

Salary sacrifice:

• Employees get a brand-new EV, or approved used, with no upfront cost.
• Employees save up to 40% on income tax and 15% on NI contributions.
• Businesses also save on employer National Insurance.
• Octopus EV’s scheme includes early termination protection in case of financial hardship.
• No cost for employers to set up and run.

What else to look for

Depending on which partner runs your salary sacrifice scheme, you could also receive:

• Insurance, maintenance and servicing included in the package.
• Discounts on chargers and charging. For example, with Octopus EV’s scheme, employees choose between home charger (with standard installation) OR 4,000 miles of public charging through the Electroverse app. 
• And can charge at home for as little as 2p per mile with an exclusive tariff from Octopus Energy.

Business contract hire:

• Perfect for fleets or where vehicles need to be reassigned.
• Works well for LLPs, partners or employees not on PAYE, where salary sacrifice isn’t available.
• Flexible mileage and term options.
• VAT registered? You can reclaim up to 100% VAT on maintenance, and up to 50% on lease costs (or more if you can prove the vehicle is used exclusively for business purposes.)

Salary sacrifice is funded from employees’ salaries, while business contract hire is funded by the business. Both reduce costs compared to company cars, but in different ways:

• Salary sacrifice: employees save on tax and NI, business saves on NI, and there’s no direct outlay by the company.
• Business contract hire: the business pays, but can reclaim VAT and avoid residual value risk.

• Salary sacrifice is ideal for employees on PAYE who want a personal EV benefit. It supports recruitment, retention and your sustainability goals – all at no cost to the company.
• Business contract hire is best if you need pooled cars, run a fleet, or have partners / LLP members who aren’t eligible for salary sacrifice.
• Car allowances don’t need to be a blocker. They can be shifted into salary sacrifice contributions, giving employees more choice and much bigger savings than a traditional company car allowance.

Yes – and many businesses do. A hybrid model lets you:

• Keep company cars or BCH for roles that need them.
• Offer salary sacrifice to the wider team.
• Provide allowances that employees can direct into salary sacrifice for maximum value.

This way, you give every type of worker – employees, partners, allowance recipients – the chance to drive electric in the most tax-efficient way.

Salary sacrifice, BCH and car allowances each have their place. But used together, they give businesses a flexible toolkit to cut costs, boost benefits, and accelerate the move to net zero.