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Employee benefit

An electric car, funded before tax touches it

Arguably the most tax-efficient route to an electric car an employee can take, and one of the rare staff benefits that costs an employer next to nothing to offer.

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In short

Under salary sacrifice, an employee gives up part of their gross pay in return for the use of a car their employer arranges. Because that slice comes out before tax, the employee saves income tax and National Insurance on it, while the employer saves its own NI on the same amount. It works almost exclusively with electric cars — the benefit-in-kind charge on an EV is low enough that the saving genuinely holds up, where it typically doesn't on petrol or diesel, and it happens to pair neatly with driving something ULEZ-exempt around the capital.

The mechanics

How it works

Employer sets up the scheme

Terms, eligibility, and what happens if someone leaves. No capital outlay required from the business.

Employee chooses a car

From the available electric range, within whatever policy caps the employer sets.

Salary is reduced

Gross pay drops by the agreed amount. Income tax and National Insurance are calculated on the reduced figure.

Employee pays BIK

A benefit-in-kind charge applies, but at the low rate for electric vehicles. The net position is normally a substantial saving.

Both sides

Who gains what

The employee gets

  • A brand new electric car for materially less than a personal lease would cost
  • Income tax and National Insurance savings on the sacrificed amount
  • Servicing, maintenance, road tax, warranty and breakdown included
  • Insurance often bundled into the scheme, unlike our standard agreements
  • No credit application, no deposit, no residual value risk

The employer gets

  • Employer National Insurance savings on the sacrificed salary
  • A genuinely valued benefit at very low net cost
  • A visible contribution to fleet and scope 3 emissions targets
  • A recruitment and retention tool that costs less than a pay rise
  • No capital outlay and no vehicles on the balance sheet to manage

Do it properly

Get these right before you launch

  • Early leavers. Decide up front who carries the cost if someone resigns mid-agreement, and put it in writing.
  • The National Minimum Wage floor. A sacrifice can't take an employee's pay below NMW, which limits participation for lower-paid staff.
  • Pension and other benefits. Reducing gross salary can affect pension contributions, life cover and statutory pay unless the scheme uses notional salary. Check the wording.
  • Charging. An EV without a sensible way to charge it is a poor benefit, especially for staff without off-street parking. Consider whether workplace charging or a home charge point contribution should be part of the offer.
  • Eligibility. Length of service, probation status and grade caps all need deciding before the first enquiry lands on HR's desk.
This isn't tax advice. Salary sacrifice interacts with payroll, pensions and employment contracts. Involve your accountant and, ideally, an employment adviser before launching a scheme.

Next step

Set up a scheme

Our salary sacrifice offering runs through Cocoon Vehicles, with full scheme documentation, an employee-facing portal and quotations for your specific salary bands.

Visit the salary sacrifice portal Talk to us first

Answers

Frequently asked questions

An employee agrees to have part of their gross pay redirected towards a car their employer arranges. Because that portion never gets taxed as ordinary salary, the employee saves income tax and National Insurance on it, and the employer saves its own NI contribution on the same amount.

Whoever takes the car pays benefit-in-kind tax on it. Petrol and diesel models attract a high enough BIK rate to wipe out most of the saving; electric models sit in a much lower band, so the saving actually holds up. That's why nearly every UK scheme sticks to electric vehicles only.

Very little in capital terms, and you'll typically come out ahead on National Insurance. The real cost is administrative, plus the risk of someone leaving mid-agreement, which most schemes handle through their terms or dedicated early-termination cover.

The first question every finance director asks. Different schemes resolve it differently: built-in protection, cost passed to the employee, or absorbed by the employer. Settle this and get it written down before the scheme goes live, not after someone's already handed in notice.

No hard minimum exists. That said, administering a scheme gets simpler with a handful of participants rather than exactly one. Worth a conversation about what's realistic given your numbers.

For an electric car, sacrifice usually wins, often comfortably — an allowance gets taxed as ordinary salary, sacrifice doesn't. For petrol or diesel, the allowance frequently comes out ahead instead. Run the numbers on both before committing either way.

Keep reading

Next step

Ask about salary sacrifice

Tell us your headcount and rough salary bands and we'll model what a scheme would look like for your business.

Get a quote 0207 183 0340