Worked examplesCars and pay
Is a salary sacrifice car worth it? The tax maths, and when it doesn't add up
An electric car through work is paid for before tax and National Insurance, with only a small tax on the car itself. For many employees that makes it far cheaper than leasing the same car privately. Here's the working, who gains most, and where it backfires.
The short answer
+£170a month
saved by leasing a £450-a-month electric car through work instead of privately.
A £65,000 earner with two children. The car comes out of pay before tax and NI, and the small tax on the car is far less than the tax saved.
The working
- Salary given up: 12 × £450
- −£5,400
- Income tax saved
- +£2,160
- National Insurance saved
- +£108
- Child Benefit kept
- +£444
- Tax on the car
- −£672
- Car costs you a year
- £3,360
- Same car leased yourself
- £5,400
- Saving this year
- +£2,040
That's £280 a month through work, against £450 leasing it yourself.
Salary sacrifice sounds like a perk, but it's really a swap. You agree to give up part of your salary, and your employer uses it to lease a car for you. Because the money never reaches your payslip, it isn't taxed. Instead, you pay a small tax on the car itself.
Whether that swap leaves you better off depends almost entirely on what kind of car it is, and how much you earn.
Does your employer need to offer it?
Yes. Salary sacrifice is a change to your employment contract, so it only works through a scheme your employer runs. You can't set one up on your own, and leasing a car privately gets no tax relief at all.
The good news is that schemes are cheap for employers to offer. Most use a specialist provider that handles the leasing, insurance and paperwork. And the employer usually comes out ahead: it stops paying 15% employer National Insurance on the salary you give up, and pays 15% on the car's much smaller taxable value instead. In the scenario below, that saves the employer about £558 a year. If your employer doesn't run a scheme, it's a reasonable thing to ask HR about.
If you run your own limited company, the route is different: the company leases the car itself. That's a separate calculation.
The scenario
| Salary | £65,000 |
| Partner's salary | £40,000 |
| Children | 2 (Child Benefit claimed) |
| Car | Fully electric, £42,000 list price |
| Salary sacrifice | £450 a month, 3-year lease |
To keep the comparison fair, assume leasing the same car privately, with the same insurance and servicing the scheme includes, would also cost £450 a month. In practice scheme prices are often lower, partly because the employer can reclaim some of the VAT.
Where the £5,400 goes
Over a year, £5,400 of salary is given up. Here's what happens to it:
| Salary given up | −£5,400 |
| Income tax saved (40%) | +£2,160 |
| National Insurance saved (2%) | +£108 |
| Child Benefit kept | +£444 |
| Tax on the car | −£672 |
| Car costs you a year | £3,360 |
£280 a month, against £450 leasing it yourself. That's £170 a month, or £2,040 this year, saved.
The Child Benefit line is easy to miss. Giving up salary lowers the income the Child Benefit charge is worked out on, so this family repays £444 less of it.
Why the tax on the car is so small
The car is taxed as a "benefit in kind": a percentage of its list price is added to your taxable income. For a fully electric car that percentage is just 4% this tax year. On a £42,000 car that's £1,680 of extra taxable income, which costs a higher-rate taxpayer £672.
The rate is set to rise each April, so the saving shrinks a little each year:
| Tax year | Electric car rate | Car costs you a month | Saving a month |
|---|---|---|---|
| 2026/27 | 4% | £280 | +£170 |
| 2027/28 | 5% | £298 | +£152 |
| 2028/29 | 7% | £334 | +£116 |
Rates are set to 2029/30, when they reach 9%.
Who gains most
The higher your tax rate, the more the swap is worth. Same car, same £450 a month, no children:
| Your pay | Car costs you a month | Cheaper than leasing yourself by |
|---|---|---|
| £40,000 (basic rate) | £352 | 22% |
| £65,000 (higher rate) | £317 | 30% |
| £65,000 with a Plan 2 student loan | £277 | 39% |
| £103,000 (the 60% band) | £267 | 41% |
A student loan adds to the saving because repayments are 9% of pay over the threshold, and the sacrificed pay is no longer counted. Whether that loan will ever be repaid in full is another question, but the saving each month is real either way.
Near £100k, the car can pay for itself
Now take a parent on £103,000, with a partner on £40,000 and a child in nursery. At £103,000, the family loses all its funded childcare hours and Tax-Free Childcare: the £100k cliff edge.
Giving up £5,400 of salary takes this parent to £97,600. The car's £1,680 taxable value is added back on, which lands their adjusted net income at £99,280. Under the line.
+£660
a month better off with the car than without it.
A parent on £103,000 with a child in nursery. Leasing the car privately would cost £450 a month instead.
The working
| Salary given up | −£5,400 |
| Income tax saved | +£2,760 |
| National Insurance saved | +£108 |
| Tax on the car | −£672 |
| Childcare support back | +£11,120 |
| Better off a year | +£7,916 |
Two things to watch here.
The car's value counts as income. A parent on £110,000 who does the same thing ends up at £106,280: still over £100,000, because the sacrifice is partly cancelled out by the car's taxable value. The car still costs them less than leasing it privately, £255 a month, but the childcare support stays out of reach unless they add a pension payment of about £6,300 on top.
The rising rate can push you back over. In the £103,000 example, the car's rate rises to 7% in 2028/29, which takes adjusted net income to £100,540. The childcare support goes again for that year, and the car costs £318 a month. A pay rise would do the same sooner. Leaving a buffer below £100,000, or adding a small pension payment, keeps it safe. The bonus worked example shows how quickly extra pay can tip a family over.
When it doesn't add up
Petrol, diesel and most hybrids. Cars over 75g/km of CO2 provided through salary sacrifice are taxed on whichever is higher: the salary you give up, or the normal car benefit. That wipes out the income tax saving. You save only National Insurance, and student loan if you have one, which rarely beats a private lease.
Plug-in hybrids with a short electric range. Their rate depends on how far they go on electric power, up to 16% this year for under 30 miles. On the same £42,000 car and £450 a month, a £65,000 earner pays £485 a month through work: £35 more than leasing privately. From April 2028 every plug-in hybrid moves to 18%.
Low pay. Salary sacrifice can't take your pay below the minimum wage for your hours, and it can cost a family its childcare support if either parent drops below the minimum earnings needed to qualify (about £10,576 a year).
Plans that might change. The sacrifice is normally fixed for the whole lease. Leaving your job, or a long period of leave, can mean early-end fees, so check what the scheme says about parental leave before signing.
Anything worked out on your salary. A lower salary on paper can reduce how much a mortgage lender will offer, and any pension or life cover set as a percentage of pay, unless your employer uses your salary before the sacrifice.
Compare like with like
Salary sacrifice quotes usually include insurance, servicing, tyres and breakdown cover. A private lease often doesn't. Before comparing, add the cost of those to the private quote, or the scheme will look worse than it is.
And the Budget on 28 October could change any of this. The rates here are the ones announced before it, and this page will be updated if they change.
General information, not financial advice. 2026/27 rules for England, Wales and Northern Ireland, as they stood before the Autumn Budget on 28 October 2026; Scottish income tax differs and funded hours are England-only. Later years hold tax bands at 2026/27 levels. Speak to a regulated adviser before acting.