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Income tax, National Insurance and net pay for any UK salary, 2026-27.
The salary sacrifice car fleet tracked by the British Vehicle Rental and Leasing Association reached 209,119 cars in the third quarter of 2025, up 123.4% year on year, and about 83% of those cars are battery electric [1]. The driver behind that growth is a single number: a fully electric company car is taxed on just 4% of its list price for the 2026-27 tax year [6].
A salary sacrifice car scheme lets an employee give up part of their gross salary in exchange for the use of a car, usually leased by the employer. Because the sacrificed pay is no longer earnings, neither income tax nor Class 1 National Insurance is due on it, and the employer saves 15% employer National Insurance on the same amount [2] [18]. The car then becomes a taxable benefit in kind, which is where the type of car decides whether the scheme works.
This guide is written for employers, payroll teams and the accountants who advise them. It explains how the arrangement works legally, how the optional remuneration rules treat electric and petrol cars differently, the benefit in kind rates through to 2029-30, worked savings for employer and employee, the minimum wage and statutory pay limits, and how the car must be reported through payroll before and after mandatory payrolling begins on 6 April 2027.
Key takeaways
- A salary sacrifice arrangement is a contractual change that reduces cash pay in return for a non-cash benefit, and the employee must agree to it [2].
- Cars with CO2 emissions of 75g/km or less are taxed on their normal benefit in kind value, not on the salary given up [4].
- The appropriate percentage for a zero-emission car is 4% for 2026-27, rising to 7% in 2028-29 and 9% in 2029-30 [7] [9].
- The sacrifice cannot take an employee's cash pay below the National Minimum Wage, which is £12.71 an hour for workers aged 21 and over from 1 April 2026 [2] [11].
- Employers pay Class 1A National Insurance at 15% on the car benefit, and company cars move into mandatory payrolling from 6 April 2027 [12] [13].
- The April 2029 cap on National Insurance relief applies to pension salary sacrifice, and car schemes were left untouched by the Autumn Budget 2025 [15] [17].
How a salary sacrifice car scheme works
HMRC defines salary sacrifice as an agreement to reduce an employee's entitlement to cash pay, usually in return for a non-cash benefit [2]. In a car scheme, the employer (or a scheme provider acting for it) leases a car, makes it available to the employee for private use, and reduces the employee's gross salary by an agreed monthly amount for the length of the lease.
The contractual change
The arrangement only works if the employment contract is genuinely changed. The employee must agree, and the varied contract must state the cash and non-cash entitlements at any given time [2]. As a general rule, if an employee can swap between cash and the benefit whenever they like, the expected tax and National Insurance advantages do not apply [2].
HMRC will not approve a proposed arrangement in advance. It looks for evidence after the event, such as the contract variation and payslips from before and after the change, to confirm that the sacrifice took effect when intended and was not applied retrospectively [2]. The broader mechanics of sacrifice across pensions, cycles and other benefits are set out in the UK employer's guide to salary sacrifice.
What the sacrifice usually covers
The monthly sacrifice is normally set to cover the full cost of the car to the employer. A typical package bundles the lease rental, insurance, servicing, maintenance, tyres and breakdown cover into one figure, so the employer carries little or no net cost. Providers commonly include early termination protection for events such as resignation or redundancy, because a leased car cannot simply be handed back mid-contract without a charge.
Each element still needs to be reflected correctly in payroll. The gross salary falls by the sacrifice amount, the car becomes a benefit in kind with its own taxable value, and any fuel or charging the employer pays for creates a separate tax position [10].
Optional remuneration arrangements and the 75g/km line
Since 6 April 2017, benefits provided through salary sacrifice have fallen under the optional remuneration arrangement (OpRA) rules [3]. These rules decide how much of the car is taxable, and they treat low-emission and higher-emission cars very differently.
Cars above 75g/km
For a car emitting more than 75g/km of CO2, the taxable amount is the higher of the salary given up and the normal benefit in kind value [3]. HMRC calls this comparison figure the relevant amount. It is calculated using a modified cash equivalent that ignores any capital contributions or payments the employee makes for private use, which are deducted only after the comparison [5].
In practice, this removes most of the tax advantage for petrol and diesel cars. An employee who sacrifices £6,000 a year for a car with a £5,000 cash equivalent is taxed on £6,000, so the income tax saved on the sacrifice is clawed straight back through the benefit charge [5]. Transitional protection for cars over 75g/km on arrangements entered before 6 April 2017 ended on 6 April 2021 at the latest [3].
Cars at or below 75g/km
Section 120A of the Income Tax (Earnings and Pensions) Act 2003 disapplies the OpRA rules for cars with CO2 emissions of 75g/km or less [4]. These cars are taxed on their normal cash equivalent, with no comparison to the salary given up, and HMRC's guidance for employers confirms that this always applies to sacrificed cars in this band [4] [2].
The table below compares the tax treatment on each side of the line.
| Feature | CO2 of 75g/km or less | CO2 above 75g/km |
|---|---|---|
| OpRA rules apply | No | Yes |
| Taxable value | Normal cash equivalent | Higher of salary forgone and modified cash equivalent |
| Typical vehicles | Battery electric, long-range plug-in hybrids | Petrol, diesel, most conventional hybrids |
| Tax saving on the sacrifice | Largely retained | Largely clawed back |
| Employer NI saving on the sacrifice | Retained, offset by Class 1A on the benefit | Largely offset by Class 1A on the higher value |
This is why salary sacrifice car schemes are, in practice, electric car schemes. The 75g/km line sits above every battery electric car and the cleanest plug-in hybrids, and below almost everything else [24].
Benefit in kind rates for salary sacrifice cars
The taxable value of a car is its list price multiplied by an appropriate percentage set by CO2 emissions and, for plug-in hybrids, electric range [6]. The employee pays income tax on that value at their marginal rate, and the employer pays Class 1A National Insurance on it [23].
Rates for the 2026-27 tax year
The appropriate percentages below apply from 6 April 2026 to 5 April 2027 [6] [7].
| CO2 emissions | Electric range | Appropriate percentage |
|---|---|---|
| 0g/km | Not applicable | 4% |
| 1 to 50g/km | 130 miles or more | 4% |
| 1 to 50g/km | 70 to 129 miles | 7% |
| 1 to 50g/km | 40 to 69 miles | 10% |
| 1 to 50g/km | 30 to 39 miles | 14% |
| 1 to 50g/km | Under 30 miles | 16% |
| 51 to 54g/km | Not applicable | 17% |
Above 54g/km, the percentage rises by about one point for every 5g/km band until it reaches the 37% maximum [6]. The zero-emission rate was 2% from 2022-23 to 2024-25 and 3% in 2025-26 [7].
The published path to 2029-30
The government has legislated a rising path for electric cars. The zero-emission rate increases by one point to 5% in 2027-28, then by two points a year to 7% in 2028-29 and 9% in 2029-30 [9]. From 2028-29, hybrids will no longer be banded by electric range, and every car in the 1 to 50g/km band will sit at 18% in 2028-29 and 19% in 2029-30 [8].
| Tax year | Zero-emission cars | 1 to 50g/km cars | Maximum |
|---|---|---|---|
| 2025-26 | 3% | 3% to 15% by range | 37% |
| 2026-27 | 4% | 4% to 16% by range | 37% |
| 2027-28 | 5% | 5% to 17% by range | 37% |
| 2028-29 | 7% | 18% | 38% |
| 2029-30 | 9% | 19% | 39% |
The 2028-29 and 2029-30 figures come from the government's policy paper on company car tax rates, which estimates about 760,000 employees drive company cars [8]. Because leases typically run for two to four years, a car ordered under a 4% rate will spend part of its contract at 5% or 7%, and employees should be shown the full path at sign-up [9].
A temporary easement protects certain plug-in hybrids caught by the Euro 6e-bis emissions test. Qualifying models registered before April 2028 keep a nominal CO2 figure of 1g/km where the new test pushes them above 50g/km, until April 2031 [17] [7].
Worked savings for employer and employee
The examples below use an electric car with a list price of £40,000 and a gross sacrifice of £500 a month (£6,000 a year), for the 2026-27 tax year in England. The benefit in kind is £40,000 × 4% = £1,600 [6]. Income tax and employee National Insurance rates come from HMRC's published rates [19] [18].
Basic rate and higher rate employees
For a basic rate taxpayer earning £40,000, the sacrifice saves £1,200 of income tax (20%) and £480 of employee National Insurance (8%). Tax on the £1,600 benefit costs £320. The net annual cost of the car is £6,000 minus £1,200 minus £480 plus £320, or £4,640, which is about £387 a month for a car that would cost £500 a month out of net pay.
For a higher rate taxpayer earning £70,000, the sacrifice saves £2,400 of income tax (40%) and £120 of employee National Insurance (2% above the Upper Earnings Limit). Tax on the benefit costs £640. The net annual cost falls to £4,120, about £343 a month [19] [18].
| Item (annual) | Basic rate employee | Higher rate employee |
|---|---|---|
| Gross salary sacrificed | £6,000 | £6,000 |
| Income tax saved | £1,200 | £2,400 |
| Employee NI saved | £480 | £120 |
| Tax on £1,600 benefit | £320 | £640 |
| Net cost of the car | £4,640 | £4,120 |
| Saving against paying from net pay | 22.7% | 31.3% |
The employer's position
The employer saves employer National Insurance at 15% on the sacrificed £6,000, which is £900 a year [18]. It pays Class 1A National Insurance at 15% on the £1,600 benefit, which is £240 [12]. The net saving is £660 per car per year before any scheme fees or retained costs.
Employers that buy zero-emission cars outright, rather than lease them, can also claim a 100% first-year allowance, extended to 31 March 2027 for corporation tax and 5 April 2027 for income tax [16]. The detail of how car benefits flow into employee tax codes and returns is covered in the guide to benefit in kind tax.
Limits on who can join
A salary sacrifice scheme is not available to every employee. Pay floors and the knock-on effects on statutory payments mean eligibility has to be checked person by person, and every payrun has to confirm the check still holds.
The National Minimum Wage floor
A sacrifice cannot reduce an employee's cash earnings below the National Minimum Wage, and HMRC expects employers to have procedures that cap deductions so pay stays at or above the minimum [2]. From 1 April 2026, the National Living Wage is £12.71 an hour for workers aged 21 and over, £10.85 for 18 to 20 year olds and £8.00 for 16 to 17 year olds and apprentices [11].
A full-time employee on 37.5 hours a week at £12.71 an hour earns £24,784.50 a year, so any sacrifice would take that worker below the floor [11]. An employee whose hours drop, or who moves to a lower-paid role mid-lease, can fall below the threshold during the scheme, which is a breach the employer has to correct [20]. Moonworkers' SME payroll software checks the post-sacrifice hourly rate on every payrun so the breach is caught before payment rather than at an HMRC inspection.
Statutory pay and benefits
Sacrificed salary is no longer earnings, so it reduces average weekly earnings. Statutory pay may be reduced or lost entirely, and where average weekly earnings fall below the Lower Earnings Limit, the employer does not have to make statutory payments [2]. Earnings-related state benefits such as Maternity Allowance and contribution-based benefits such as the State Pension can also be affected [2].
Statutory Maternity Pay is paid at 90% of average weekly earnings for the first six weeks, so a lower post-sacrifice salary feeds directly into a lower payment [21]. Scheme policies should state what happens to the car and the sacrifice during maternity leave, long-term sickness and other periods of reduced pay, because Statutory Sick Pay cannot cover a monthly sacrifice for long [22].
Reporting the car through payroll
A sacrificed car creates two separate reporting tasks: the reduced salary, which flows through every Full Payment Submission, and the car benefit itself, which is reported either at year end or through payroll.
P11D and Class 1A for the 2026-27 tax year
Where the car is not payrolled, the employer reports it on form P11D and declares the total Class 1A National Insurance on form P11D(b) by 6 July after the end of the tax year [12]. Class 1A must be paid by 22 July, or 19 July by cheque, and a late P11D(b) attracts a penalty of £100 per 50 employees for each month or part month [12]. The step-by-step process is in the guide to the P11D form.
If the employer pays for private fuel, a car fuel benefit charge applies on top, calculated from a multiplier of £29,200 for the 2026-27 tax year [10]. For a zero-emission car, there is no fuel benefit charge for electricity [23].
Mandatory payrolling from 6 April 2027
From 6 April 2027, company cars, vans, car and van fuel and medical benefits move into mandatory payrolling, with most remaining benefits following from 6 April 2028 [13]. Employers will calculate Class 1A National Insurance in real time through payroll software for these benefits [13]. HMRC has also confirmed that, from the same date, Class 1A on voluntarily payrolled benefits must be payrolled in real time rather than reported at year end [14].
For a salary sacrifice car, the result is that both halves of the arrangement (the reduced salary and the taxable benefit) will run through the same payroll each period. The preparation steps are covered in the guide to mandatory payrolling of benefits. Accountants running car schemes across several client payrolls can manage the changeover from a multi-client payroll dashboard, and platforms that sell benefits to employers can embed the same calculations through an HMRC-recognised payroll API.
How car schemes compare with pension salary sacrifice
Pension contributions are the other large category of salary sacrifice, and the two are about to diverge. From April 2029, only the first £2,000 a year of employee pension contributions made through salary sacrifice will be free of National Insurance, with employer and employee contributions due above that [15]. The published guidance covers pension contributions only [15].
Commentary on the Autumn Budget 2025 noted that car salary sacrifice was left untouched and may grow as pension sacrifice is restricted [17]. The same Budget announced a pay-per-mile Electric Vehicle Excise Duty from April 2028, at a proposed 3p a mile for electric cars and 1.5p for plug-in hybrids, and raised the expensive car supplement threshold from £40,000 to £50,000 from April 2026 [17]. The interaction with pension schemes is explored in the guide to salary sacrifice pension National Insurance.
Model take-home pay after a sacrifice
Before offering a scheme, an employer can model an employee's take-home pay at the reduced salary with the Moonworkers UK salary calculator, which applies the 2026-27 PAYE and National Insurance rules to any gross figure.
£ per month
e.g. 1257L, S1257L, BR, D0
S = Scotland · C = Wales · W1/M1 = non-cumulative
Enter a salary or hourly rate above
About this calculator
This calculator gives you a close estimate of your UK payroll deductions for 2026-27, using HMRC's exact percentage method with periodised thresholds. It handles the three tax territories, K codes with the 50% regulatory limit and its carry-forward, weeks 53, 54 and 56, the cumulative and W1/M1/X bases, student and postgraduate loans, and pension contributions on qualifying earnings. It still won't match your payslip to the penny in every case: it does not cover in-year tax code changes, payrolled benefits in kind, NI deferral across more than one employment, directors on the annual earnings period, or employer-level annual adjustments such as the Employment Allowance and the apprenticeship levy. Powered by the same engine as the Moonworkers Payroll API.
Frequently asked questions
Why might the result differ from my payslip?
This calculator uses your current gross pay and tax code to produce an estimate. K-code carry-forwards and weeks 53, 54 and 56 are handled, and the Year-to-date section reproduces a specific period exactly. What your employer may apply that this does not: a mid-year tax code change, benefits in kind processed through payroll, or NI deferral across more than one employment. For most employees on a standard tax code the difference is negligible.
What tax code should I enter?
Use the tax code shown on your most recent payslip or the PAYE Coding Notice (P2) from HMRC. If you're not sure, 1257L is the standard code for most employees resident in England, Wales, or Northern Ireland. Use S1257L for Scotland or C1257L for Wales if you pay Scottish or Welsh income tax.
Which NI category applies to me?
Most employees use Category A. Use M if you are under 21, H if you are an apprentice under 25, or C if you are over State Pension age. Your employer is responsible for assigning the correct category — if in doubt, check your payslip.
Which student loan plan am I on?
Your plan depends on when and where you studied. Plan 1 covers students who started before September 2012. Plan 2 is for English and Welsh students who started from September 2012 to July 2023. Plan 5 applies to English students who started from August 2023. Plan 4 covers Scottish students. You can check your plan at gov.uk or on your payslip.
What is the YTD cumulative PAYE mode?
HMRC's standard method calculates income tax on your total earnings to date each period, then subtracts tax already paid. If you're mid-year and want to see exactly what tax should be deducted in a specific period, expand the Year-to-date section and enter your running totals from previous periods only.
Conclusion
A salary sacrifice car scheme works because three rules line up: the sacrificed salary escapes income tax and both sides of Class 1 National Insurance, cars at or below 75g/km sit outside the optional remuneration rules, and electric cars carry the lowest benefit in kind rates in the system. Remove any one of those and the scheme loses most of its value, which is why the market has converged so firmly on battery electric cars.
The rules will not stand still. Benefit in kind rates for electric cars more than double between 2026-27 and 2029-30, mandatory payrolling brings the car benefit into every Full Payment Submission from 6 April 2027, and pay-per-mile duty arrives in 2028. Employers that hold benefit rates, minimum wage checks and Class 1A calculations as live payroll logic, rather than as a year-end spreadsheet exercise, will be able to keep their schemes compliant as each change lands.
Frequently asked questions
Is a salary sacrifice car scheme worth it for a basic rate taxpayer?
For an electric car, a basic rate taxpayer typically saves income tax at 20% and National Insurance at 8% on the sacrificed amount, minus 20% tax on a benefit valued at 4% of list price for 2026-27 [6] [18]. On a £500 monthly sacrifice for a £40,000 car, that brings the net cost down to around £387 a month. The saving is much smaller for petrol and diesel cars because the optional remuneration rules tax them on at least the salary given up.
Can an employee leave a salary sacrifice car scheme early?
Because salary sacrifice is a contractual change, an employee cannot generally switch back to cash at will without undermining the tax treatment [2]. Most schemes allow early exit only on specified events, such as leaving employment, and leased cars usually carry an early termination charge. Scheme providers commonly offer insurance or protection against that charge for events like redundancy.
Does salary sacrifice for a car affect maternity pay?
Yes. Sacrificed salary reduces average weekly earnings, which can lower Statutory Maternity Pay or remove entitlement if earnings fall below the Lower Earnings Limit [2]. SMP is paid at 90% of average weekly earnings for the first six weeks, so the reduced salary flows straight into the payment [21]. Employers should set out in the scheme policy how the car and sacrifice are handled during family leave.
Do salary sacrifice cars have to be reported on a P11D?
For the 2026-27 tax year, a sacrificed car is reported on form P11D by 6 July after the end of the tax year unless the employer payrolls it, and Class 1A is declared on form P11D(b) [12]. From 6 April 2027, company cars move into mandatory payrolling, so the benefit and its Class 1A National Insurance will be processed through payroll in real time instead [13].
