HMRC salary sacrifice: rules and limits explained

Salary sacrifice is an agreement between you, the employer, and your employee to reduce their pay in return for a non-cash benefit. 

It's allowed, it's well established, and HMRC doesn't run it or approve it. HMRC sets out how tax is treated, and since 2017 that treatment has changed for most benefits. 

This guide covers the HMRC salary sacrifice rules that matter if you're thinking about launching an electric car scheme for your organisation. If you're an employee wondering whether salary sacrifice is for you, skip ahead to who can take part.

• HMRC doesn't approve salary sacrifice schemes. It sets the conditions, and it won't comment on an arrangement before you've put it in place.
• Most benefits lost their tax advantage on 6th April 2017, when the optional remuneration arrangement rules came in.
• Electric cars kept their tax advantage. Any car emitting 75g/km of CO2 or less sits outside of these rules, which is why EV schemes are worth it for many drivers.
• There's no HMRC cap on how much salary an employee can sacrifice for a car. Your employees’ gross pay just can’t go below National Minimum Wage, and you can set your own scheme rules to cover any other exclusions.
• The £2,000 salary sacrifice cap arriving in April 2029 applies to pensions. It doesn't affect cars.

With salary sacrifice, your employee gives up part of their pre-tax salary to pay for a non-cash benefit. HMRC's rules cover how you set that up and how the benefit is taxed, but they don’t approve the scheme before you go live.

Three things have to be in place for the arrangement to work.

1. The employment contract has to be updated. GOV.UK describes salary sacrifice as an agreement to reduce an employee's entitlement to cash pay, usually in return for a non-cash benefit. That's officially a change to their employment terms, not a deduction from their payslip.
2. The change has to happen before the salary is earned. HMRC sets this out in its employment income manual. You can sacrifice future pay, but you can't sacrifice pay an employee has already earned.
3. The arrangement has to be contracted. The employee gives up the right to the cash. If they can take the money back whenever they feel like it, it isn't a sacrifice.

Then there's the part most employers don't expect. HMRC won't comment on a proposed salary sacrifice arrangement before it's been put in place. There's no pre-clearance, no approval letter and no scheme number, so nobody is going to hand you a document confirming you've done it correctly. It's less alarming than it looks. The rules are published, the tax treatment for electric cars is settled, and the paperwork is standard. What it does mean is that getting the setup right is your job. 

Almost anything can be offered through salary sacrifice. The real question is whether it still saves tax. 

Since 6th April 2017, most benefits have been taxed on the salary given up or the normal value of the benefit, whichever is bigger, which removes the advantage. A short list of benefits was excluded from this rule. Which is where the savings still are.

The full list of excluded benefits is longer than this one, so if you're considering something that isn't here, your accountant can confirm where it sits.

The rules that did this are called optional remuneration arrangements, or OpRA, and you'll see that abbreviation all over HMRC's guidance.

One thing to be aware of. The 2017 rules removed the income tax advantage from most benefits, not every trace of a saving, because the treatment varies by benefit and by which class of National Insurance applies. If you're weighing up something that isn't on the excluded list, that's a conversation for your accountant.

No. The HMRC salary sacrifice rules set no cash limit on how much an employee can give up for a car. There's no annual allowance and no maximum. But the important thing to note here is the arrangement can't take an employee's gross pay below the National Minimum Wage. Which essentially means if a full time employee earns over £31,000 a year they’re clear of this limit.

Beyond that, salary sacrifice limits aren’t set by HMRC. If you want to set additional limits on who’s eligible for your EV salary sacrifice scheme, you can with Octopus EV. You decide who's eligible and how much they can sacrifice. Some employers set a cap well above the legal floor, or a minimum salary or seniority level.

Our affordability checks do the rest. A car lease usually runs for three or four years. A sensible limit is the one an employee can live with for the whole term, not the one the rules technically allow.

Because of a carve-out written into the rules. The optional remuneration arrangement rules don't apply to cars with CO2 emissions of 75g/km or less. Those cars are taxed on the Benefit-in-Kind cash equivalent instead, with no comparison against the salary given up. A fully electric car produces no tailpipe emissions, so every EV qualifies.

That’s the reason EV salary sacrifice exists, and what makes it tax efficient for drivers. Without it, an electric car would be taxed the same way as a petrol one, on the higher of the two figures, and the arrangement would lose most of its point.

The Benefit-in-Kind rate for a zero emission car sits at 4% for the 2026/27 tax year. It's legislated to rise gradually from there, reaching 9% in the 2029/30 tax year. Those are still much lower low rates compared with a petrol or diesel car, which is what makes the sums work for the driver. Hybrids sit on one side of the 75g/km line or the other depending on the model, so they're a separate conversation. Here’s some more detail on which types of cars are best for salary sacrifice.

Most employees on PAYE can, as long as the sacrifice doesn't take their cash pay below the National Minimum Wage. That floor is the one rule you can't design around. Everything else, including length of service, probation and contract type, is for the employer to decide.

If someone earns close to the minimum wage, sacrificing a few hundred pounds a month simply isn't available to them. Our own rough rule of thumb, as at September 2026, is that a salary above about £31,000 gives most people enough headroom for a typical car. Below that it depends on the car, the hours worked and how close the pay already sits to the floor.

The rest is the employer’s, because HMRC doesn't set eligibility for a car scheme, you do. Employers often ask for a minimum period of service, exclude people still on probation, and think carefully about fixed-term contracts that end before the lease does.

Some people will miss out, and it's better to know who before you launch than after. Lower-paid and part-time staff are most likely to be ineligible, because the sacrifice is a fixed monthly amount and their cash pay has less room for manoeuvre. 

Above the £31,000 rule of thumb, there's no reason a scheme can't be open to the majority of your workforce. This isn't a benefit that has to be reserved for senior staff, and clients that open widely tend to get better take-up.

There's one final thing every employee should understand before they sign, and it can easily be missed. Sacrificing salary reduces pre-tax pay. That can affect pension contributions, statutory maternity pay, mortgage affordability assessments and anything else worked out from salary. It isn't a reason to avoid salary sacrifice, but it’s worth being aware of.

Public sector employers are often different, with their own approval routes and scheme rules sitting on top of the tax position. If you're in the NHS we’ve written a guide for you, and for schools or colleges, the latest advice from the Department for Education is here. If you’re in any local government, start with speaking to your own finance team.

If your employer offers EV salary sacrifice with Octopus EV, just login to see which cars are available. The first time you log in you’ll need your company code, which your HR team can share with you.

Change the employee’s contract in writing, protect the minimum wage floor, report the car as a benefit and pay Class 1A National Insurance on it. The HMRC salary sacrifice rules give you nothing to register and no return of their own to file. The obligations are the ordinary ones that come with providing a company car.

• Change the contract, in writing. The sacrifice is a change to the employee's terms and conditions. Put it in writing, have the employee agree it, and keep the record. This is the document that shows the arrangement was in place before the pay was earned.
• Put a minimum wage cap in place. GOV.UK asks employers to put procedures in place that cap the deduction so minimum wage rates are maintained. In practice that's a payroll check which stops a sacrifice from breaching the floor before it starts.
• Report the car as a benefit. A car available for private use is a taxable benefit, and it's one of the things you'll need to report in the normal way, the same as any other company car.
• Pay Class 1A on the Benefit-in-Kind. The employer Class 1A National Insurance rate for the 2026/27 tax year is 15%, charged on the Benefit-in-Kind value rather than on the salary sacrificed.
• Get ready for mandatory payrolling. From 6th April 2027, payrolling benefits in kind becomes mandatory and company cars are in the first phase. If you currently report car benefits after the end of the tax year, this is a change to plan for. 

Whichever EV salary sacrifice provider you choose will ask you to set out a lot of these details in your paperwork when you set up, which we’ve covered in our guide to how salary sacrifice works. You should check with your accountant whether your particular scheme set up meets HMRC’s rules.

No. From 6th April 2029, only the first £2,000 an employee sacrifices into their pension each year stays free of National Insurance. That change applies to pensions. It doesn't affect cars taken through salary sacrifice.

It's worth saying plainly because the headlines were broad and the detail wasn't. 

If someone in your business has read that salary sacrifice is being capped, the cap is on pension contributions above £2,000 a year and it starts in the 2029/30 tax year. The rules on salary sacrifice cars haven’t changed.

There's no cost to an employer to set up an EV salary sacrifice scheme with us. We provide the scheme documents your legal and payroll teams will want to read, and the monthly reporting payroll needs in order to process the sacrifice. The monthly figure covers the car, insurance, servicing, maintenance, tyres, road tax and breakdown cover. 

We'll help you set the rules, including the minimum wage checks, but who can join your scheme is your decision to make. 

If you need any help at all just get in touch and we’ll help you put the case forward. 

HMRC doesn't set a cash limit for salary sacrifice cars. The only hard rule is that gross pay can't drop below the National Minimum Wage, which from 1st April 2026 is £12.71 an hour for workers aged 21 and over. Your employer may set its own cap on top of that.

No. There's no approval process and no scheme to register. HMRC won't comment on a proposed arrangement before it's in place. Your job is to change the employee's contract before the pay is earned, keep the record, and report and tax the benefit correctly.

The arrangement can't go ahead at that level. GOV.UK asks employers to put procedures in place that cap the deduction so minimum wage rates are maintained. In practice that means a payroll check first, and then a smaller sacrifice, a cheaper car, or no car at all.

There’s no age limit for salary sacrifice set by HMRC, but to get an EV through salary sacrifice from Octopus EV you’ll need to be between 18-75 years old, and no older than 78 at the end of the contract. 

Yes. Eligibility is set by the employer rather than by HMRC. Common conditions include a minimum period of service, passing probation, and holding a contract that runs at least as long as the lease. The minimum wage floor then applies on top of whatever you decide.