Salary Sacrifice Car Leasing Explained: How It Works in the UK

A salary sacrifice car lease allows employees to lease a new car by giving up part of their gross salary each month. The key advantage is that the deduction happens before tax and National Insurance, which means you pay less tax overall.

It’s one of the most cost-effective ways to drive a new car, especially an electric or hybrid vehicle, and more UK employers are now offering this as part of their employee benefits.
All Car Leasing provides a wide range of business car leasing and electric car leasing deals that can work under salary sacrifice arrangements.

What Is a Salary Sacrifice Car Lease?

A salary sacrifice car lease is an agreement between you, your employer, and a leasing provider. Instead of paying for a car from your take-home pay, the cost is deducted from your gross salary.

This means you reduce your taxable income and National Insurance contributions. In return, you get access to a brand-new vehicle, often with maintenance, breakdown cover, and road tax included.

The scheme is HMRC-approved and works best for electric or low-emission cars, where Benefit-in-Kind (BiK) tax rates are much lower. For many drivers, this makes it far cheaper than a personal car lease.

How Does the Salary Sacrifice Scheme Work?

Here’s a simple overview of how the process typically works:

1. Employee chooses a car through their employer’s approved leasing provider.

2. Employer signs the lease and pays the monthly amount to the provider.

3. Lease cost is deducted from the employee’s gross salary.

4. Employee drives the car, saving on income tax and National Insurance.

5. At the end of the term, the car is returned or replaced with a new lease.

Example of Tax Savings

If you earn £40,000 a year and lease an electric car worth £400 per month, your actual cost after tax savings could be closer to £260–£280 a month. That’s because the deduction reduces your taxable salary before tax and NI are applied.

For electric car leasing, the Benefit-in-Kind rate is currently 2% until 2025/26, which keeps costs low and predictable.

Salary Sacrifice vs Company Car: What’s the Difference?

A salary sacrifice lease gives employees more choice and flexibility than a traditional company car. It suits those who want to pick their own car and enjoy tax benefits without owning the vehicle.

Salary Sacrifice vs Car Allowance

Both salary sacrifice and car allowance give employees access to a vehicle, but they work differently.
With salary sacrifice, you give up part of your gross salary before tax to pay for a leased car — this means you save on income tax and National Insurance.
A car allowance, on the other hand, is a cash benefit added to your salary, which is then taxed like normal income.

Salary sacrifice is usually the better option if you want a new, low-emission or electric car with lower running costs and less admin.
A car allowance might suit those who prefer to buy a used car or want full control of ownership.

Benefits of Salary Sacrifice Car Leasing

Choosing a salary sacrifice car lease offers several clear benefits:

• Save on income tax and National Insurance

• Drive a new, fully maintained car without upfront cost

• No deposit required (similar to no deposit car leasing)

• Fixed monthly payments covering maintenance and breakdown

• Low Benefit-in-Kind tax for electric and hybrid cars

• Ideal for employees who prefer predictable motoring costs

Employers also benefit by improving staff retention and supporting sustainability goals through low-emission vehicle options.

Salary Sacrifice for Electric Cars

Electric vehicles are the most popular choice under salary sacrifice schemes in the UK. This is due to their 2% Benefit-in-Kind rate and exemption from road tax until 2025.

Popular choices include:

• Tesla Model 3 for premium EV users

• Hyundai Kona Electric for practical commuting

• Kia EV6 and Volkswagen ID.3 for families and long-distance drivers

You can explore these models under our dedicated section for Tesla leasing, Hyundai leasing, Kia leasing, and Volkswagen leasing.

A salary sacrifice electric lease helps drivers access new EVs at much lower costs compared to traditional leasing or purchasing.

Is Salary Sacrifice Worth It?

Advantages

• Tax-efficient for employees

• Predictable costs with maintenance and insurance options

• Helps promote greener driving and company sustainability

Disadvantages

• Reduces gross salary, which can slightly affect pension and benefits

• Early termination costs apply if you leave your job mid-term

• Employer participation required

In most cases, the salary sacrifice car lease is worth it for employees who plan to stay in their role and want an affordable, low-emission vehicle.

How to Set Up a Salary Sacrifice Car Scheme

For employers, setting up a scheme is straightforward:

1. Partner with a leasing company such as All Car Leasing

2. Choose eligible car models and terms

3. Define staff eligibility and communicate benefits

4. Adjust payroll to reflect the salary exchange

5. Manage the scheme through the provider’s portal

All Car Leasing can help your business set up a compliant and flexible scheme for your team, especially for electric or hybrid car leasing.
You can contact our leasing team for guidance on building a plan that suits your organisation.

Final Words

Salary sacrifice car leasing is an effective way for UK employees to save on tax while driving a new electric or hybrid car. It supports sustainability, reduces running costs, and simplifies vehicle management.

If you’re an employee exploring your options or a business owner looking to add this benefit, All Car Leasing can guide you through every step.