How does salary sacrifice work? A step-by-step explainer

Salary sacrifice lets your employees give up part of their pre-tax salary in exchange for a benefit. In this case, an electric car. Because the money comes out before Income Tax and National Insurance, they pay less tax. So do you, as the employer. 

The reason it makes sense for electric cars is because the tax (known as Benefit -in-Kind) that you as the employer, and your employees, pay on electric cars is much lower than hybrid, petrol or diesel cars. More on that below.

So how does it actually work in practice? Here's a worked example for both sides, what setting up involves, where the risk sits, how to launch it, and the monthly admin. 

• Salary sacrifice reduces an employee's pre-tax pay in exchange for a benefit. Electric cars are taxed at a low Benefit-in-Kind rate, so the driver typically pays less than they would by leasing the same car themselves.
• You save employer National Insurance on every pound your employee sacrifices. Employer Class 1 National Insurance is 15% for the 2026/27 tax year, so £6,000 sacrificed by your employee saves about £900 a year before the Class 1A the employer pays on the car.
• Setting up and running a scheme with us is free. Most of the work to get set up involves internal decisions and paperwork, and it usually takes weeks rather than months.
• It isn't admin-free, but we’ve minimised it. We estimate it to take around 15 to 25 minutes per car to set up, and about a minute a month per car. 

Salary sacrifice is where an employee gives up part of their pre-tax salary, and you provide a non-cash benefit instead. Income Tax and National Insurance are then worked out on the lower salary, so both the employee and employer hand less to HMRC. HMRC's name for these is optional remuneration arrangements.

Everything else follows from that one change to the employment contract. 

To set up EV salary sacrifice for your team members, you’ll need to: 

1. Agree it in writing before the salary is earned. HMRC won't accept an arrangement applied after the fact. With us, that's done through contracts we provide, signed by both sides.
2. Set the reduced salary in payroll. Income Tax and National Insurance then follow automatically.
3. Report the benefit. A car is taxable, so you’ll need to report it to HMRC and pay employer Class 1A National Insurance on it. We help with the reporting on this.

HMRC's optional remuneration rules normally tax the employee on whichever is higher, the salary given up or the value of the benefit, which wipes out most of the advantage. But cars emitting 75g/km of CO2 or less sit outside those rules. 

Which covers every fully electric car, so they’re taxed on its Benefit-in-Kind (BiK) value instead, at 4% for the 2026/27 tax year. Petrol cars don’t get this favourable treatment from HMRC, while BiK is higher and is rising more quickly for hybrids over the next few years, so they make less financial sense than EVs when it comes to salary sacrifice.

Here's the whole journey, from both sides, from the time your employees order their EV, to the day the car goes back.

The assumptions: an employee earning £60,000 sacrifices £6,000 a year of pre-tax salary. The car has a list price of £40,000 and zero tailpipe emissions.

Your side first, because that's the number your finance director will ask for.

Now your employee's side.

So the employee gives up £6,000 of salary and their take-home pay falls by £4,120. The car costs them £1,880 less than it would out of taxed income, before you count what's bundled into the monthly figure.

And your saving scales with take-up. One car saves you £660 a year in this example. Ten cars, £6,600. A hundred, £66,000. That's why it's worth modelling your own uptake based on your team’s size, rather than working from a percentage, and we'll help you do that. The employee side is covered in more depth in our employee guide.

This is an illustration, not a quote. It uses England, Wales and Northern Ireland rates for the 2026/27 tax year, checked in September 2026. Scottish Income Tax rates differ. Individual results depend on salary, tax band, the car and the tax year, and a real quote also depends on postcode, contract length and annual mileage.

For you, the employer, it's a National Insurance saving on every pound sacrificed, and a benefit your team values without adding to the salary bill. 

For your employees, it's a new electric car paid for from pre-tax salary, with the running costs bundled in.

Now the honest bit. Sacrificing salary reduces pre-tax pay, and that can affect anything worked out from it: pension contributions, statutory maternity, paternity and redundancy pay, what a mortgage lender will offer, and student loan repayments. HMRC's guidance for employers sets out the details. Your team may ask, so it’s worth pointing them to this guidance.

There's also a floor. Sacrifice can't take anyone's pay below the National Minimum Wage, at £12.71 an hour for people aged 21 and over, so some of your team won't be eligible. Our rule of thumb is that gross pay needs to be above about £31,000. If a lot of your workforce sits near that level, plan how you'll explain who can and can't take part. Lower-cost models and approved used EVs widen the group who can join. And if you already run a car allowance, the two can sit side by side.

Setting up an EV salary sacrifice scheme is free, and most of the setup is in decisions you need to make and paperwork to do, rather than changes to your systems. 

1. Build the internal case. Model your eligible headcount, likely take-up and the National Insurance saving. Our guide to building a business case for EV salary sacrifice walks through it, and we can run the numbers with you.
2. Get the right people in the room. HR usually leads the conversation, but finance, payroll and legal all need to say yes, and a senior sponsor helps. Start those conversations early. Payroll in particular needs to see how it fits what they already do.
3. Sort the paperwork. There are five documents to set up, all signed by your business: 
   • The Master Hire Agreement, which is the legal agreement that lets you hire electric cars from us 
   • A Credit Application Form, which captures your company details to make sure we can lease the cars to you as the employer 
   • A Set Up Form, which captures your VAT recovery preference, what you want to do with the National Insurance saving, worker classification, key contacts and your email domains 
   • A Direct Debit Mandate for the monthly payments.
   • A Driver Handbook for your team, which sets out the agreement they’re taking on with you as the employer 
   • After that you just need to approve each car your team members order. Your approver signs a Vehicle Hire Schedule to place each order, the employee signs a Driver Agreement with their quote and cost breakdown, and they get a Driver Handbook, which gives them the full details of the scheme.
4. Set your scheme rules. Who's eligible, whether people must pass probation before ordering, which contract lengths you'll offer, and what happens on a return that isn't covered. These go into your Driver Handbook, which we provide a template for, and can help you edit.
5. Sort out payroll. There's nothing to integrate. Each month we send you a salary sacrifice report, and whoever runs your payroll uploads it into your payroll system and applies the deductions. So the question for payroll is who owns that upload, not whether the systems talk to each other.
6. Learn the dashboard. Before launch, we walk you through approving orders, promoting the scheme, tracking take-up, downloading reports and invoices, and the carbon reporting. Knowing how it works is helpful before you launch it to your team.
7. Launch. We’ve covered this in more detail, but your main job is to let your team know about the awesome new benefit they have access to. You'll have a dedicated account manager throughout. 

EV salary sacrifice is only worth it if people order cars, and take-up comes from a proper launch rather than a link on your intranet that no one sees. You can build interest even before the scheme launches - in fact we recommend it. The best launches have people ready to order on day one. Here's how we’ll help make your launch a success:

• The Octo-Pack. A free resource hub built for the person leading the scheme at your end. Digital posters sized for benefits portals, office screens and internal channels. A poster and slide download. A benefits portal pack with graphics and copy. 
• A teaser campaign. We’ll share ready made promotional materials for you to build excitement with your team in the lead up to the scheme launching. 
• Launch to everyone at once. Opening the scheme to all eligible employees from day one beats piloting with a small group. A pilot without an end date tends to just delay the real launch. We can host a 30 minute webinar to educate employees on salary sacrifice to kick things off. 
• An activation call. HR, payroll and your senior sponsor on one call before launch, so everyone knows what happens in month one.
• Something fun. A sweepstake on first-month orders costs nothing and gets people talking.
• Giving your team access to offers. You can share your team’s email addresses with us, so we can update them on what’s on offer. No spam, we promise.  

And the most important one. The first few employees to get a car are your best promotion. One colleague who's had a good experience, and says so at the coffee machine, is more valuable than hearing it from you or us. 

It’s less admin than most payroll teams expect, but it’s not zero admin. Per car, it works out at about 15 to 25 minutes to set up, then about a minute a month after that. 

Across a three-year lease that's roughly 45 to 50 minutes of admin per car, from the first order to the return. Those figures are our own estimate, and may differ depending on your set up.

Here's roughly how much time it takes, per car.

P46(Car) form can be found here.

At scheme level, we send you a salary sacrifice report on the 5th of each month with everything payroll needs, and an invoice that matches it. You can download both from your dashboard. 

You need to declare company car benefits on a P11D after the tax year ends, or payroll them during the year, and HMRC is making payrolling mandatory from April 2027. 

That removes the P46(Car) and P11D steps and cuts setup time to about 10 to 15 minutes per car. Our P11D explainer covers the form in the meantime.

What you don't need to do:

• Chase employees
• Answer questions about cars
• Arrange servicing
• Run the ordering process.

Employees serve themselves online and talk to our EV specialists directly. We won't call that admin-free, because it isn't. But we minimise it as much as possible for you. 

At the end of the term the car is collected, the payroll deduction stops, and your employee either orders another car or leaves the scheme. Your part is small. Here’s what you need to do:

1. Confirm the return date and the collection with us.
2. Stop the salary sacrifice deduction in payroll and reset the employee's salary.
3. Update the benefit reporting so the car drops off the P11D, or out of payrolling.
4. If they're re-ordering, approve the new order in the dashboard.

The question employers sometimes ask is who fits the bill for repairs at the end of the contract. We assess all returns against the BVRLA fair wear and tear standard, which most reputable leasing companies use, so nobody is making a judgement call on your behalf.

 Every car comes with a £500 damage waiver, at the end of the term and on early returns alike. Above that, the driver pays for the repair, not your business. If the repairs cost over £500, the driver will be liable for the whole repair cost, for example, if they cost £600, the driver would pay £600, not £100. 

And if they’ve gone over their agreed mileage, we charge for any excess mileage at a rate agreed at the start of the contract.

Most drivers who reach the end of a contract order again. At that point your job is simply to click to approve, rather than another launch.

Over 10,000 UK employers run their EV salary sacrifice scheme with us. It's free to set up, there are no fees, and the National Insurance saving is yours to spend how you wish, rather than something we hold back.

Your employees pick an electric car and pay for it from pre-tax salary. Insurance, servicing, maintenance, tyres, MOTs and breakdown cover are included in the monthly amount. 

They also choose a charging offer: 

• £400 off a home charger, 
• £400 of home charging credit 
• Or £400 of public charging credit for people without a driveway

Those who can charge at home also get access to a discounted home energy tariff - Octopus Energy's Intelligent Octopus Go - EV Saver tariff. One provider for the car, the charger and the energy, which matters when you're the one managing suppliers.

Early termination protection is built in rather than sold as an add-on. You get a dedicated account manager and an HR dashboard for approvals, take-up, carbon reporting and payroll reports. 

Eligibility checks run automatically, so nobody can order a car that would take them below the minimum wage. And you set your own rules on who can join, so the scheme looks a little different in every business. To see what yours could look like, get in touch.

Usually weeks rather than months. With Octopus EV, there's no cost to set up and no system change on your side. The time goes on internal decisions: who's eligible, what the rules are, and getting HR, finance, payroll and legal aligned. Many customers are fully set up within a month.

No, not to set up. Once it's running, you pay Class 1A National Insurance on the car's BiK value, at 15% for the 2026/27 tax year. That's usually smaller than the Class 1 National Insurance you save on the sacrificed salary, so most schemes end up being National Insurance positive for the business.

They hand it back. With our scheme, resignation, redundancy and dismissal are covered once the car has been on the road for three months, so there's no exit fee for you or them. Leave before that point and there’s a fee of 50% of the remaining rental. Set out who covers it in your scheme policy - which we can help with when you set up.

About 15 to 25 minutes per car to set up, then about a minute a month per car. Over a three-year lease that's roughly 45 to 50 minutes per car in total. Each month we send a report on the 5th of the month, with everything payroll needs, plus a matching invoice. You approve new orders or process leavers as they happen.

No. Sacrifice can't take anyone's pay below the National Minimum Wage, which is £12.71 an hour for people aged 21 and over from April 2026, so lower-paid staff may not qualify. Employers also set their own rules, such as passing probation first. Lower-cost and approved used electric cars widen the group who can take part.