Work out your take-home pay
Income tax, National Insurance and net pay for any UK salary, 2026-27.
A fully electric company car carries a benefit in kind of just 4% of its list price in the 2026-27 tax year, against a maximum of 37% for the most polluting cars [3]. Because cars emitting 75g/km of CO2 or less sit outside the optional remuneration rules, an electric car taken through salary sacrifice is still taxed on that low percentage rather than on the salary given up [2].
That combination explains why electric car salary sacrifice has become one of the most widely offered benefits in UK payroll. The employee gives up gross pay, so income tax and employee National Insurance fall, and the employer pays less Class 1 secondary National Insurance at 15% on the reduced salary [13]. In return, the employer pays Class 1A National Insurance on the car benefit and must report it to HMRC [15].
For payroll teams, the scheme is less simple than the marketing suggests. A sacrifice has to change the employment contract, cannot push cash pay below the National Minimum Wage, can reduce statutory payments, and interacts with tax codes, P11D reporting and, from 6 April 2027, mandatory payrolling of car benefits [1].
This guide explains how the arrangement works, why electric cars are treated differently from petrol and diesel cars, how the benefit in kind is valued, what the employer saves and owes, worked figures for basic and higher rate employees, the payroll controls that keep the scheme compliant, and how reporting changes when car benefits move into real time.
Key takeaways
- A salary sacrifice is an agreement to reduce an employee's entitlement to cash pay, usually in return for a non-cash benefit, and it requires a change to the employment contract [1].
- Cars with CO2 emissions of 75g/km or less are excluded from the optional remuneration rules, so they are taxed on the normal benefit in kind value [2].
- A zero emission car has an appropriate percentage of 4% for 2026-27, up from 3% for 2025-26 [3].
- The employer pays Class 1A National Insurance at 15% on the taxable value of the car benefit [13].
- A sacrifice must never reduce cash earnings below the National Minimum Wage, and employers must cap deductions accordingly [1].
- Company cars are in the first phase of mandatory payrolling of benefits in kind, which begins on 6 April 2027 [12].
How a salary sacrifice electric car scheme works
In a typical scheme, the employer leases an electric car from a leasing provider and makes it available to the employee for private use. The employee agrees to give up an amount of gross salary each month for the length of the lease, often two to four years. The employer recovers the lease cost from the salary given up, and the employee is taxed on the car as a benefit in kind.
HMRC's Employment Income Manual describes the starting point: "A salary sacrifice happens when an employee gives up the right to part of the cash remuneration due under his or her contract of employment" [4]. The same manual notes that from 6 April 2017, the income tax and National Insurance advantages of benefits provided through salary sacrifice were "largely withdrawn" [4]. Low emission cars are one of the few areas where the advantage survives.
The contract change at the heart of the scheme
A sacrifice only works if the employee's contractual entitlement to cash genuinely falls. HMRC guidance states that an employer can set up the arrangement "by changing the terms of your employee's employment contract", and that the employee needs to agree to this change [1]. Where an employee opts in or out, the contract must be altered with each change [1].
The manual distinguishes a real reduction from a mere deduction. Employer and employee may have "genuinely reduced the employee's entitlement to cash remuneration in exchange for provision of a benefit", or they may have kept the original entitlement and simply redirected part of it, in which case HMRC says "this is not a successful salary sacrifice" [5]. A failed sacrifice means the full salary remains taxable and NICable, and the car is taxed on top.
Opting out and lifestyle changes
Most car schemes lock the employee in for the lease term, because the employer carries the lease liability. HMRC accepts that terms may need to change "where a lifestyle change significantly alters an employee's financial circumstances", listing events such as marriage, divorce and a partner becoming redundant or pregnant [1]. Arrangements can allow opting in or out in these cases [1].
What the scheme cannot allow is a free switch. HMRC warns that if an employee "swaps between cash earnings and a non-cash benefit whenever they like", the expected tax and National Insurance advantages will not apply [1]. Scheme documents therefore usually set out early termination charges and the specific events that permit an exit.
Why electric cars escape the optional remuneration rules
Since April 2017, most benefits provided through salary sacrifice or a cash alternative fall under the optional remuneration arrangement (OpRA) rules [20]. Under OpRA, the taxable value of a benefit is the higher of the normal benefit in kind value and the cash given up. For a petrol car, that usually means tax on the full salary sacrificed, which removes most of the saving.
The 75g/km exclusion
HMRC's manual is explicit: "The optional remuneration arrangement rules do not apply to cars with CO2 emissions of 75 grams or less per kilometre" [2]. Such cars continue to be taxed on the cash equivalent of the benefit "without having to make a comparison with the salary foregone" [2].
The employer-facing guidance repeats the rule: for cars with CO2 emissions of no more than 75g/km, the employer "should always use the earnings charge under the normal benefit in kind rules" [1]. HMRC's company car calculator reflects this, telling users to answer "no" to the optional remuneration question for electric cars and cars at 75g/km or less [11].
Transitional rules that have now ended
When OpRA arrived, arrangements already in place before 6 April 2017 kept the old valuation for a period [6]. For cars above 75g/km, the protection ran until the earlier of a variation or renewal of the arrangement and 6 April 2021 [6]. HMRC removed the section on pre-2017 arrangements from its salary sacrifice guidance in 2021 because the transitional arrangements had come to an end [1].
The practical result is a clear dividing line for every scheme running today, summarised below.
| Car type | CO2 emissions | Valuation through salary sacrifice | Source |
|---|---|---|---|
| Fully electric | 0g/km | Normal benefit in kind value | [2] |
| Plug-in hybrid | 1 to 50g/km | Normal benefit in kind value | [2] |
| Low emission | 51 to 75g/km | Normal benefit in kind value | [2] |
| Petrol, diesel, conventional hybrid | Above 75g/km | Higher of benefit in kind value and salary given up | [20] |
Valuing the benefit in kind on an electric car
The car benefit is the car's list price multiplied by an appropriate percentage set by CO2 emissions and, for cars emitting 1 to 50g/km, by the electric range [3]. The resulting cash equivalent is added to the employee's taxable income and is also the base for the employer's Class 1A charge [24].
Appropriate percentages for zero and ultra-low emission cars
HMRC publishes the percentages in its company car tables [3]. For plug-in hybrids, the electric range drives the result, so two cars with the same emissions figure can sit several bands apart [11].
| CO2 (g/km) | Electric range (miles) | 2025-26 | 2026-27 |
|---|---|---|---|
| 0 | n/a | 3% | 4% |
| 1 to 50 | 130 and above | 3% | 4% |
| 1 to 50 | 70 to 129 | 6% | 7% |
| 1 to 50 | 40 to 69 | 9% | 10% |
| 1 to 50 | 30 to 39 | 13% | 14% |
| 1 to 50 | Under 30 | 15% | 16% |
Source: HMRC Employment Income Manual, company car tables [[3]](https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim24705).
For a fully electric car with a list price of £45,000, the 2026-27 cash equivalent is 4% of £45,000, which is £1,800. A basic rate taxpayer pays 20% tax on that amount and a higher rate taxpayer 40% [16]. The equivalent petrol car at the 37% maximum percentage would carry a cash equivalent of £16,650 [3].
Adjustments that reduce the cash equivalent
The normal company car rules continue to apply to a sacrifice car under 75g/km, because the car is valued under the ordinary benefit rules [2]. A capital contribution from the employee towards the car can reduce the list price used in the calculation, up to a maximum of £5,000, and the benefit is reduced where the car is unavailable for at least 30 consecutive days [24].
Optional accessories added to the car increase the list price for benefit purposes [24]. For most electric car schemes, where the car arrives from the leasing provider with a fixed specification, the list price on the order confirmation is the figure the payroll team needs to record.
Charging and electricity costs
HMRC's exemption page states that an employer does not have to pay or report on charging an employee's fully electric car "if you own or hire it" [8]. The same page also states that the car or fuel must be reported to HMRC if it is provided as part of a salary sacrifice arrangement [8], and the wider guidance warns that "exemptions on benefits in kind do not apply to salary sacrifice schemes" [1].
Employers that reimburse business mileage in an electric company car can use HMRC's advisory electric rates. From 1 September 2026, these are 7 pence per mile for home charging and 15 pence per mile for public charging [7]. If the mileage rate paid is no higher than the advisory rates, there is no taxable profit and no Class 1A National Insurance to pay [7].
These rates apply only to employees using a company car, and HMRC states they "must not" be used in any other circumstances [7]. An employee driving a private car for business is covered instead by the approved mileage allowance rates, which for cars stand at 55p per mile for the first 10,000 business miles [13].
Worked examples: what the employee and employer save
The figures below are calculated with the Moonworkers engine on 2026-27 rules for an employee in England with no student loan. In each case, the employee sacrifices £6,000 a year (£500 a month) for a fully electric car with a list price of £45,000, so the benefit in kind is £1,800 and HMRC's tax code falls by 180 points, from 1257L to 1077L [27].
Example 1: basic rate employee on £45,000
Before the sacrifice, an employee paid £45,000 on code 1257L pays £6,484.20 income tax and £2,594.40 employee National Insurance, for take-home pay of £35,921.40. After sacrificing £6,000 and moving to code 1077L, gross pay is £39,000, income tax is £5,644.20, employee National Insurance is £2,114.40 and take-home pay is £31,241.40.
| Item | Before sacrifice | After sacrifice | Difference |
|---|---|---|---|
| Gross salary | £45,000 | £39,000 | £6,000 |
| Income tax | £6,484.20 | £5,644.20 | £840 |
| Employee NI | £2,594.40 | £2,114.40 | £480 |
| Take-home pay | £35,921.40 | £31,241.40 | £4,680 |
| Employer Class 1 NI | £6,000 | £5,100 | £900 |
Take-home pay falls by £4,680 for a car whose gross cost to the employee is £6,000. The employee's net saving of £1,320 is the combination of income tax and NI no longer due on the sacrificed salary, less tax on the £1,800 benefit. The employee NI rate of 8% between the primary threshold and the upper earnings limit applies to the whole sacrifice [23], and the benefit itself attracts no employee NI [13].
Example 2: higher rate employee on £60,000
A higher rate employee on £60,000 pays £11,428.40 income tax and £3,210.60 employee National Insurance, with take-home pay of £45,361. After the same £6,000 sacrifice and code 1077L, income tax is £9,748.40, employee National Insurance is £3,090.60 and take-home pay is £41,161, a fall of £4,200.
The income tax saving is larger because the sacrificed salary was taxed at 40% [16]. The NI saving is smaller, at £120, because all of the sacrificed pay sat above the upper earnings limit, where the employee rate is 2% [23]. Higher rate employees therefore gain most of their saving from income tax rather than NI.
The employer's side of the ledger
In both examples the employer's Class 1 secondary contribution falls by £900, because 15% is no longer due on £6,000 of salary [13]. Against that, the employer owes Class 1A at 15% on the £1,800 benefit, which is £270 [13]. The net saving of £630 per car is often passed back to the employee or used to fund insurance, maintenance or a charge point.
Class 1A is paid once a year for the previous tax year and must reach HMRC by 22 July, or 19 July when paying by post [19]. Where car benefits are payrolled, the Class 1A is still worked out and declared on form P11D(b) [17].
Payroll controls that keep the scheme compliant
The tax treatment is generous, but the scheme still runs through the payroll every month. Three controls matter most: the minimum wage floor, the effect on statutory payments and the treatment of pensions.
The National Minimum Wage floor
HMRC guidance is direct: "A salary sacrifice arrangement must not reduce an employee's cash earnings below the National Minimum Wage" rates, and employers "must put procedures in place to cap salary sacrifice deduction" [1]. The minimum wage guidance explains why: the amount sacrificed "reduces their pay and so cannot be used as part of their pay for minimum wage purposes" [9].
The car itself does not help. "Benefits in kind do not count towards minimum wage pay, even if they have a monetary value" [9]. With the National Living Wage at £12.71 an hour for workers aged 21 and over [21], a full-time employee on a modest salary can fall below the floor after a £500 monthly sacrifice, especially in a month with unpaid leave. Payroll software should test each pay period, not only the annual figures.
Statutory pay and average weekly earnings
Salary sacrifice reduces the earnings used to calculate statutory payments. HMRC notes that it "can cause some employees to lose their entitlement altogether" [1], and that where average weekly earnings fall below the lower earnings limit, the employer does not have to make statutory family payments [1]. For 2026-27 that limit is £129 a week [13].
Earnings-related statutory pay is also lower. Statutory Maternity Pay for the first six weeks is 90% of average weekly earnings, then the lower of £194.32 and 90% of those earnings [28]. Statutory Sick Pay is the lower of £123.25 a week and 80% of average weekly earnings [26]. A lower contractual salary feeds into both figures, so many scheme policies explain how the car is handled during family leave.
Pensions, the other common sacrifice
Many employees on an electric car scheme also sacrifice salary into a pension. HMRC's manual confirms that employer contributions into registered pension schemes "are excluded from the April 2017 changes" [14], so the two sacrifices sit under different rules. Combined sacrifices make the minimum wage test more likely to bite, because every pound sacrificed is removed from pay for minimum wage purposes [9], so the two need to be modelled together.
The order in which deductions are applied matters for software. A car sacrifice reduces the contractual salary before pension contributions are calculated on qualifying earnings, so the pension figure can also fall unless the scheme rules use a notional pre-sacrifice salary. An employer offering both should document which salary each benefit is calculated on.
Reporting the car: P11D, payrolling and the 2027 change
Reporting is where most errors happen. A car provided through salary sacrifice must be reported to HMRC as a benefit [8], and the reporting method is about to change.
Current reporting routes
Employers that do not payroll the benefit report it on a P11D for each employee, with the P11D(b) declaring the Class 1A due, by 6 July after the end of the tax year [18]. Employers with fewer than 500 employees can submit through HMRC's PAYE Online service [25].
Employers already registered to payroll benefits add the car's cash equivalent to taxable pay each period and do not need a P11D for that benefit [17]. HMRC's online registration service closed to new registrations and only serves employers registered before 6 April 2026 [17].
| Reporting route | How tax is collected | Year-end form | Source |
|---|---|---|---|
| P11D (not payrolled) | Through the employee's tax code | P11D and P11D(b) by 6 July | [18] |
| Voluntary payrolling | Benefit added to taxable pay each period | P11D(b) only | [17] |
| Mandatory payrolling (cars, from 6 April 2027) | Benefit reported in real time through RTI | Class 1A reported in real time | [22] |
Mandatory payrolling from 6 April 2027
HMRC's draft guidance confirms that reporting of benefits in kind through payroll software becomes mandatory from April 2027 [22]. Phase 1 starts on 6 April 2027 and covers company cars, car fuel, vans, van fuel and employer-provided medical benefits, with most other benefits following from 6 April 2028 [12].
Electric cars on salary sacrifice are therefore among the first benefits that must move into the payroll. Associated Class 1A contributions must also be payrolled in real time from 6 April 2027 [22]. For employers running dozens of sacrifice cars, the payroll system will need the list price, CO2 figure, electric range and availability dates for each car, which today often sit in a leasing provider's spreadsheet.
What the payroll system needs to hold
A compliant set-up records the sacrifice amount as a contractual pay reduction rather than a deduction from net pay, so that tax and NI are calculated on the reduced figure [1]. It holds the car data needed to calculate the cash equivalent [11], applies the minimum wage cap each period [9], and keeps the pre-sacrifice salary for pension and statutory pay rules where scheme policy requires it.
Moonworkers' HMRC-recognised payroll software for SMEs handles salary sacrifice as a gross pay reduction and payrolls car benefits through the FPS. Platforms building their own benefits product can call the same logic through the UK payroll engine, and bureaux running schemes for several clients can manage them from the multi-client payroll dashboard. For the wider picture of how cars are taxed, the Moonworkers guide to company car tax and the explainer on benefit in kind tax cover the rules beyond salary sacrifice.
Costs outside payroll: vehicle tax and the lease
Electric cars now pay Vehicle Excise Duty. Zero emission cars pay £10 in the first year, then the standard rate of £200 [10]. An electric car with a list price of more than £50,000 attracts an extra £440 a year for five years from the second time it is taxed, which also applies to electric vehicles registered between 1 April 2025 and 31 March 2026 [10].
These costs are usually built into the lease rental and therefore into the salary sacrificed. They do not change the benefit in kind, which rests on list price, the appropriate percentage and any capital contribution [24]. The details of a full car scheme, including early termination and insurance, are covered in the Moonworkers guide to the salary sacrifice car scheme.
Model the take-home effect before launch
Before offering a scheme, an employer can test the effect of a sacrifice on take-home pay with the Moonworkers UK salary calculator, which applies the 2026-27 PAYE and National Insurance rules to any gross salary and tax code.
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S = Scotland · C = Wales · W1/M1 = non-cumulative
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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
An electric car taken through salary sacrifice keeps its tax advantage because of a single line in the legislation: cars at 75g/km or less are valued on the normal benefit rules rather than on the salary given up. At an appropriate percentage of 4%, the tax on the benefit is small compared with the income tax and National Insurance no longer due on the sacrificed pay, and the employer keeps a margin after Class 1A.
The compliance work sits in the payroll. Contracts must change, minimum wage caps must run every period, statutory pay and pensions must be calculated on the right salary, and from 6 April 2027 the car benefit itself moves into real-time reporting. Employers that hold accurate car data and run the sacrifice as a true gross pay reduction will make that transition without disruption, and the move to mandatory payrolling of benefits is the natural next step to plan for.
Frequently asked questions
Is a salary sacrifice electric car taxed on the salary given up?
No. Cars with CO2 emissions of 75g/km or less are excluded from the optional remuneration rules. The employee is taxed on the normal benefit in kind value, which is the list price multiplied by the appropriate percentage, not on the salary sacrificed.
What benefit in kind rate applies to an electric car through salary sacrifice?
For the 2026-27 tax year, a fully electric car has an appropriate percentage of 4%, up from 3% for 2025-26. Plug-in hybrids with emissions of 1 to 50g/km fall between 4% and 16%, depending on their electric range.
Can salary sacrifice take an employee below the minimum wage?
No. A salary sacrifice must not reduce cash earnings below the National Minimum Wage, and the car does not count as pay for minimum wage purposes. Employers must cap the sacrifice in any pay period where it would breach the floor.
Does the employer still pay National Insurance on a salary sacrifice electric car?
Yes, but less. The employer saves Class 1 National Insurance at 15% on the salary given up and pays Class 1A National Insurance at 15% on the much smaller benefit in kind value. The Class 1A is paid by 22 July after the end of the tax year.
