What is salary sacrifice? A UK guide for employers

Salary sacrifice is when an employee gives up part of their pre-tax salary in return for something, like a pension contribution, an electric car, or a bike. 

It happens before Income Tax and National Insurance are paid, so you (as the employer) and your employee usually hand less money over to HMRC. This article covers how it works, what you can offer through it, and what to check before you go ahead. 

Does your company already run a scheme? To find out how EV salary sacrifice works as an employee, check out our employee guide to EV salary sacrifice. 

• Salary sacrifice changes your employment agreement. It reduces your pre-tax pay in return for a benefit.
• The company and the employee pay less National Insurance, because it's worked out on a lower salary. Employer National Insurance is 15% for the 2026/27 tax year.
• Pensions, cars, cycle to work, and tech are the usual benefits available through salary sacrifice. But they aren't all taxed the same way so some work out as more of a saving than others.
• Lower pre-tax pay can reduce statutory maternity and redundancy pay, some pension contributions, and what a mortgage lender will offer.
• Legally, a salary sacrifice agreement can’t take your gross pay below the National Minimum Wage.

Salary sacrifice is an arrangement where an employee gives up part of their pre-tax salary, and you (the employer) provide a non-cash benefit instead. 

Income Tax and National Insurance are then worked out on the reduced salary. So the employee, and you as the employer, pay less tax.

The official name HMRC gives these is ‘optional remuneration arrangements’.

Say someone earns £60,000 and sacrifices £6,000 a year. They're taxed as though they earn £54,000, the benefit is paid for by the salary they've given up.

Your employee ends up with less cash and something else instead. That ‘something else’ usually costs more to buy themselves, outside of salary sacrifice.

Salary sacrifice works by changing the employment contract. Your employee gives up part of their cash earnings, and gains a contractual right to a benefit. Payroll then runs on the lower salary. Everything you have to do follows from that.

1. Agree it in writing before the salary is earned. HMRC won't accept an arrangement applied retrospectively. If you choose Octopus EV, this is done via contracts we provide. These contracts are signed by both sides, and set out the amount given up, the benefit provided and how long it runs.
2. Set the new salary in payroll. Income Tax and National Insurance then follow automatically.
3. Report the benefit where it's taxable. Some benefits are exempt. Cars need to be reported to HMRC, and they attract employer Class 1A National Insurance. We’ll help you with this reporting. 
4. Keep checking that it's still valid. A pay change or a drop in hours can push someone under the minimum wage floor.

Employees usually keep the benefit for the duration of their contract, but when the unexpected happens, our EV salary sacrifice scheme includes early termination protection, so you and your team won’t foot the bill for early returns that are covered. 

Five salary sacrifice benefits are most common in the UK: pension contributions, cars, cycle to work, workplace nursery provision and technology. 

They aren't taxed the same way, and that's what decides how much a scheme is worth to either side.

Worth noting: your employees can't give up pay they've already earned, and any salary sacrifice agreement can’t take their gross pay below the National Minimum Wage.

Savings on National Insurance. Employer Class 1 National Insurance is 15% on earnings above the secondary threshold for the 2026/27 tax year. Reduce your employees’ pre-tax pay and you cut that bill. 

On £6,000 sacrificed, you’d typically save around £900 a year (as the employer) before any Class 1A charge on the benefit.

And that saving scales with headcount and take-up. So it's worth modelling your expected uptake on your own workforce rather than working from a percentage. Ten employees taking up the scheme will change the savings. A hundred will transform the savings.

Three other things tend to matter to whoever signs a salary sacrifice scheme off.

• It doesn't add to the salary bill. Your people get something worth having without you giving them a pay rise. With our EV salary sacrifice scheme, unlike others, you also decide what to do with the National Insurance saving: keep it, fund the scheme's running costs, or put it back into benefits.
• It gives people a reason to stay. Car schemes run on a fixed term, so someone part-way through one is tied in, to an extent. Use that as a supporting argument for your business case. 
• It can show up in your emissions reporting. An EV scheme can reduce the Scope 3 emissions you report, and the change is measurable, which helps if you already have a target to hit.
• What it won't do is run itself. Salary sacrifice does require some payroll admin: deductions to apply, invoices to reconcile, joiners and leavers to process, reporting to produce. Ask any provider for a realistic estimate of that in hours, and be wary of anyone who tells you there's none.

Your employees get more for their money than they would buying the same thing out of take-home pay. The amount comes out before Income Tax and National Insurance, so take-home pay falls by less than the value of the benefit they’re getting. How much less depends on salary, tax band and the benefit itself.

Who saves the most with salary sacrifice? It depends on the car they choose, and their tax bracket. Someone paying 40% Income Tax on the sacrificed amount keeps more of each pound than a basic-rate taxpayer does.

There's a second effect worth flagging to your team. Sacrificing salary reduces adjusted net income, which can matter near a threshold. The point where the personal allowance starts to be withdrawn, for instance, or where child benefit charges kick in. Anyone close to either should get advice on their own position.

A lower salary can impact everything else worked out from pre-tax pay.

• Pension contributions. Where the benefit isn't a pension, contributions can fall, unless your scheme bases them on pre-sacrifice pay.
• Statutory maternity, paternity and adoption pay. Calculated from average earnings, so a sacrifice in the reference period reduces them.
• Statutory redundancy pay. Also based on the lower figure.
• Mortgage and credit affordability. Lenders assess the reduced salary. Some account for the arrangement, some don't. It’s worth checking if you’re about to buy a house. 
• Student loan repayments. Worked out on the lower salary, so monthly repayments drop and the term stretches.

Not disadvantages as such, but two structural things worth knowing: 

• The minimum wage floor. Sacrifice can't take anyone below it, and that's £12.71 an hour for workers aged 21 and over from 1 April 2026. If a lot of your workforce is paid near the National Minimum Wage, you’ll want to consider how you communicate who can and can’t get a car through the scheme before you launch. 
• Commitment. Most arrangements run for a fixed term, and leaving early can carry a cost depending on the scheme rules and what the provider covers. Ask what happens on resignation, redundancy, long-term sickness and parental leave.

There's no single cap. The hard limit is the National Minimum Wage, which your employees’ gross pay can’t legally go under. Beyond that, limits come from your scheme rules and, for pensions, the annual allowance.

One change is coming. At Autumn Budget 2025 the government announced that from April 2029, employee pension contributions made through salary sacrifice will be exempt from National Insurance only up to £2,000 a year. Anything above that attracts employer and employee National Insurance. It's now law, in the National Insurance Contributions (Employer Pensions Contributions) Act 2026, which received Royal Assent in May 2026.

The cap covers pension contributions. It leaves other salary sacrifice arrangements alone, cars included. 

Electric cars work differently from most benefits, for one technical reason. HMRC’s rules normally tax an employee on the higher of the salary given up or the value of the benefit, which wipes out most of the advantage. Those rules don't apply to cars emitting 75 grams of CO2 per kilometre or less, which covers every fully electric car.

So an electric car is taxed on its Benefit-in-Kind (BiK) value. The BiK percentage for a fully electric car is 4% of list price for the 2026/27 tax year. 

It rises to 5% for 2027/28, then by two percentage points a year, to 7% and then 9% by 2029/30. Money that would’ve otherwise gone to HMRC goes towards the car instead.

This is an illustration, not a quote. It uses England, Wales and Northern Ireland rates for the 2026/27 tax year, checked in August 2026. 

Scottish Income Tax rates differ. Individual results depend on salary, tax band, vehicle and tax year, and a real quote also depends on postcode, contract length and annual mileage.

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.

The employer’s side of the same example: 

The exact numbers will depend on your employee’s salary, their tax bracket, the length of the contract, how many miles they expect to drive, and the value of the car. 

Yes. And for many businesses, it’s a smart move. Offering EV salary sacrifice alongside car allowance gives employees more choice and can significantly increase their savings. 

It also helps employers move away from higher-emission vehicles without forcing a one-size-fits-all approach. If you want more detail, our article on car allowances vs salary sacrifice explains how the two can work together.

We're one of the providers running these schemes for over 9,000 UK employers. 

Your employees pick an electric car and pay for it from pre-tax salary. Servicing, maintenance, tyres and breakdown cover sit inside the monthly figure rather than arriving as separate bills, and insurance is included as standard on most schemes. Your team also choose a discounted home charger or charging credit, and get additional perks through Octopus Energy. 

It's free for you to set up. Eligibility checks run automatically before anyone can order, so nobody can commit to a car that would take their pay below the minimum wage. You set the rules on who can join. 

You handle order approval, take-up tracking, carbon reporting and payroll reports all through your HR dashboard. 

Then there's what happens if someone gives a car back early. Our early termination protection covers you from day one for parental leave, long-term sickness, loss of licence, and death of the driver, their spouse or partner. From three months after the car’s delivered, we also cover resignation, redundancy and dismissal. So you, and your Finance Team, don’t have to worry about unexpected fees if an employee needs to give their car back early.

And finally, on the fairness question: employees can choose from a huge range of smaller, lower-cost EV models and approved used EVs. This widens the group who can take part without going near the minimum wage floor.

What is the downside of salary sacrifice?

A lower salary follows your employee into anything worked out from pre-tax pay. That covers statutory maternity and redundancy pay, pension contributions in some schemes, and mortgage affordability. Most arrangements also run for a fixed term, so leaving early can carry a cost depending on the scheme rules.

What happens when you salary sacrifice?

The employment contract changes. Your employee gives up an agreed amount of pre-tax salary, and you provide a benefit in its place. Income Tax and National Insurance are then worked out on the reduced salary. Their payslip shows the lower salary figure, rather than a deduction further down.

Is salary sacrifice a good idea?

It depends on salary, tax band and what someone would otherwise spend on the benefit. It tends to suit people who want the benefit anyway and earn comfortably above the minimum wage. It suits people near the minimum wage, or close to a mortgage application, less well.

What is the maximum you can salary sacrifice?

There's no single cap. The hard limit is that sacrifice can't take pay below the National Minimum Wage. Individual schemes set their own limits, and pension contributions are also subject to the annual allowance. A £2,000 National Insurance cap on pension sacrifice applies from April 2029.

Does salary sacrifice affect pension contributions?

It can. Where someone sacrifices for something other than a pension, contributions based on salary may fall, unless you base them on pre-sacrifice pay. Tell your employees which basis your scheme uses before they sign up, because most won't think to ask.