Company car coming up for renewal? If your employer offers a car allowance as an alternative, it could be a good opportunity to explore going electric through salary sacrifice.

The reason is simple, a cash car allowance is normally taxed like salary. Using gross pay for an EV through a salary sacrifice scheme can help that allowance go further, thanks to savings on Income Tax and employee National Insurance, alongside low electric company car tax.

A £500 car allowance does not mean £500 in your pocket

A normal fixed car allowance is added to your gross pay and is generally subject to Income Tax and National Insurance. That means the amount available to spend on a private car can be considerably smaller than the allowance your employer offers. 

For example, a £500 monthly allowance would typically leave:

These examples assume 20% Income Tax and 8% employee NI, or 40% Income Tax and 2% employee NI, using 2026/27 rates. 

That remaining amount needs to cover your private car arrangements, including any insurance, servicing and maintenance payable separately.

Salary sacrifice uses gross pay to fund your EV

Through your employer’s salary sacrifice scheme, you agree to give up some of your gross cash pay in exchange for an electric car. The sacrificed amount is removed before Income Tax and employee NI are calculated. 

So, where your employer’s scheme allows it, the gross pay associated with your car allowance can help fund the EV before those deductions reduce its value.

This must be arranged through your employer and payroll. Taking the allowance home and using it to pay for a personal lease does not provide the same tax advantage.

There is still car tax, but EVs benefit from a low rate

An electric car provided through salary sacrifice is still a company car for tax purposes. You pay Benefit-in-Kind tax, often shortened to BiK, on its private use.

For the 2026/27 tax year, a fully electric car’s taxable benefit is 4% of its P11D value, broadly its list price including relevant extras. You then pay your Income Tax rate on that benefit, rather than 4% of the car’s value directly. 

For an EV with a £40,000 P11D value, this works out at approximately:

• £26.67 a month for a 20% taxpayer.
• £53.33 a month for a 40% taxpayer.

What happens when the allowance covers the sacrifice?

Imagine your employer replaces your current company car with a £500 monthly gross allowance, and your chosen EV requires a £500 monthly gross salary sacrifice.

The allowance adds £500 to your gross cash pay, while salary sacrifice removes £500. Your gross cash pay is therefore broadly back where it started, with the EV’s BiK tax still payable.

In this example, compared with your salary before the new allowance and excluding your old company car tax, the additional take-home-pay cost would broadly be the EV’s BiK tax: £26.67 or £53.33 a month.

If the sacrifice is higher than the allowance, you fund the difference from your existing gross salary. If it is lower, the unused allowance remains taxable cash pay.

Why this works for electric cars

HMRC normally has rules that limit tax advantages when an employee chooses a benefit instead of cash.

However, cars emitting 75g/km of CO₂ or less, including fully electric cars, are excluded from that comparison. They continue to be taxed under the normal company car benefit rules.

That is why giving up a taxable allowance for an EV can be particularly attractive: you replace tax and NI on the surrendered cash with a relatively small EV car tax charge.

Could you be better off than with your current company car?

Potentially, especially if you currently drive a petrol or diesel company car with a higher BiK tax charge and the new allowance covers most or all of your EV sacrifice.

But the allowance needs to be suitable. An employer-funded company car already provides a valuable benefit, and an existing electric company car receives the same low EV BiK treatment. Switching to an allowance and salary sacrifice does not automatically create an extra saving.

The useful comparison is your final take-home pay, the car you receive and the costs covered under each option.

What is included in EV Salary Sacrifice?

Lease Electric's salary sacrifice scheme is extremely comprehensive and includes the following for the life of the contract;

• All servicing and maintenance costs.
• The cost of unlimited tyre replacements and repair.*
• Fixed cost, fully comprehensive motor insurance for the Contract period with two extra named drivers allowed.
• Road tax for your vehicle for the term of your contract (at the prevailing rate).
• Full vehicle roadside breakdown and recovery service.
• Drivers can opt to include a Pod Point Solo 3s 7kW Home Charge Point and Standard Installation (up to 15m of cabling, and 3m of trunking from the meter to the outside wall)- More information

You just have to add electricity and/or Fuel.

* We have a Fair Play policy on tyres. This means that damaged tyres will be replaced inside the maintenance budget. Replacements in the event of abuse, neglect, theft or vandalism will be recharged.The maintenance scheme does not cover driver abuse, damage or replacement as a result of neglect. These charges will be billed via a vehicle services invoice.

EV Salary Sacrifice FAQs

Benefits for employers too

Employers can also save National Insurance compared with paying the allowance as cash, although employer NI remains payable on the EV benefit. Those savings may help support the scheme or reduce employee costs, depending on how the employer structures it.

For businesses reviewing their company car arrangements, an allowance alongside EV salary sacrifice can be an option worth exploring. The full fleet costs and scheme terms still need to be compared.

Let’s look at the numbers for you

At Lease Electric, we can help you compare your current company car, the allowance on offer and suitable EV options through your employer’s salary sacrifice scheme.

We’ll explain what is included in your quote, how the allowance affects the figures and what the change could mean for your take-home pay. No need to work it all out on your own.

Figures are illustrative and use 2026/27 rates for England, Wales and Northern Ireland, assuming the full allowance falls within the stated tax and NI bands. Scottish Income Tax rates differ. Individual payroll circumstances can change the outcome. EV BiK percentages rise to 5% in 2027/28, 7% in 2028/29 and 9% in 2029/30, so comparisons should cover the full agreement. Salary sacrifice must meet minimum wage rules and can affect pension calculations and statutory pay. www.gov.uk