In 2025, 47% of SMEs Are Prioritising Flexible Benefits: How Salary Sacrifice Car Schemes Play a Key Role

Salary sacrifice has gained significant attention over the years, with more businesses adopting it more than ever before—and for good reason. It is an excellent benefit that companies offer to their employees, providing valuable advantages for both parties.

Surveys reveal that one in two SMEs identify financial challenges as their biggest obstacle to offering benefits packages. This insight comes from a report by Howden Employee Benefits in partnership with YouGov. With rising national insurance contributions and the ongoing cost-of-living crisis, salary sacrifice emerges as a valuable solution. It helps reduce NI contributions for employers, offering cost savings of 2% to 12%, depending on the amount an employee sacrifices.

Not only is salary sacrifice a valuable benefit for SME for their employees, but it also helps reduce your business’s indirect emissions—particularly from employee transportation as its incentive to switch to a vehicle that emits zero emissions.

Transportation is one of the largest contributors to emissions, and by encouraging employees to drive zero-emission vehicles through salary sacrifice schemes, businesses make significant strides toward sustainability goals.

Reducing your emissions not only aligns with the growing pressure on businesses to achieve net-zero targets but also enhances your eligibility for public sector contracts, where environmental considerations are often critical.

We will delve deeper into these advantages later in the article.

What is Salary Sacrifice?

If you are not familiar with salary sacrifice, it is an arrangement where an employee agrees to give up a portion of their gross salary in exchange for a product or service. This allows employees to save on national insurance and income tax. The benefits do not stop there – employers also save on National Insurance contributions. It is a practical solution that benefits both parties.

Salary sacrifice is becoming an increasingly popular benefit, especially as more employees express interest in benefits like company cars. As employees place more value on the benefits their companies offer, salary sacrifice presents a great opportunity for businesses to meet those needs. It is a win for employees who gain access to valuable benefits, and for employers who offer these benefits in a cost-effective way.

Employees Benefits:

• With a reduced gross salary, employees enjoy cost savings on tax and National Insurance.
• Drive a brand-new electric vehicle for an affordable fixed monthly cost.
• No credit checks or initial payment required.
• Maintenance, road-side assistance, insurance, and early termination included in the fixed monthly cost.

Employers Benefits:

• Reduce National Insurance contributions, leading to significant cost savings.
• Attract and retain top talent in a competitive job market, with a desirable benefits package.
• Support sustainability efforts by helping to reduce company emissions with electric vehicle options.

Benefit-in-Kind (BIK) Tax

With salary sacrifice, employees pay Benefit-in-Kind (BIK) tax on their vehicle, but the BIK rate is significantly lower for electric vehicles, making it a cost-effective option. The rate is based on the vehicle’s emissions—zero-emission, for example, have a BIK rate of just 2% for the 2025/2026 tax year. On the other hand, vehicles with emissions over 170g/km face a much higher BIK rate of 37%. This difference creates a strong financial incentive for both employers and employees to choose electric vehicles through salary sacrifice, taking advantage of lower BIK rates.

The Cost-Effectiveness of Salary Sacrifice

As mentioned earlier in the article, many SMEs face challenges when it comes to offering benefits, primarily due to the associated costs. However, salary sacrifice presents a great benefit with minimal cost. Most electric vehicle salary sacrifice schemes differ in terms of pricing, with some charging a small administration fee. Many providers offer their own salary sacrifice portals with low administration fees, making the process even more cost-effective.

The overall cost is typically low, which is one of the key reasons salary sacrifice schemes have become so popular. These portals allow employers to manage the process easily, enabling employees to view available options, select vehicles based on their preferences and emissions, and streamline approvals—all in a simple and efficient system.

As an employer, here is how the NI savings work: you can choose to pass these savings onto your employees, keep the savings for the business, or allocate a percentage of the savings to your employees. This flexibility allows you to tailor the salary sacrifice scheme to suit both your business and your employees' needs.

Example:

Let’s say an employee earns ￡30,000 annually. By using salary sacrifice for an electric vehicle, the employee sacrifices ￡5,000 of their salary to cover the cost of the vehicle. This amount represents the annual rental of the vehicle, which breaks down to a monthly cost of ￡416.66 over 12 months.

Before salary sacrifice:

The employer pays National Insurance contributions on the full ￡30,000 salary.

After salary sacrifice:

The employee’s taxable salary is reduced to ￡25,000. The employer’s NI contributions are now calculated on this lower amount.

NI Savings:

For an employer, the standard rate of NI contributions is 13.8% for earnings above the threshold.

On the original ￡30,000 salary, the employer pays ￡4,140 in NI contributions.

After salary sacrifice, the employer pays NI on the reduced salary of ￡25,000, resulting in ￡3,450 in contributions.

Savings:

The employer saves ￡690 in National Insurance contributions for this employee.

This is a simplified example, but it clearly shows how salary sacrifice can lead to substantial savings for employers, especially when multiple employees are part of the scheme.

Sustainability and Public Sector Contracts

As the UK advances its Net Zero by 2050 plan, businesses face increasing pressure to cut carbon emissions across operations and supply chains. For many service sectors, supply chain emissions, or "embodied carbon," are often the most significant, making it essential for businesses to address these indirect impacts to remain competitive.

For those targeting public sector contracts, a credible net-zero plan is now vital. Policies like the Procurement Policy Note (PPN) require suppliers to disclose their carbon footprint across all scopes—direct, energy-related, and supply chain emissions. Taking proactive steps to lower emissions not only aligns with these requirements but enhances a business's competitive edge as public sector buyers increasingly favour sustainable suppliers.

Salary sacrifice schemes for electric vehicles (EVs) provide a practical and impactful way to reduce emissions, particularly those tied to employee transportation. While they may not solve every aspect of a company’s carbon footprint, they represent a great step in the right direction. Encouraging EV adoption is a great place to start, helping businesses address one of their emission sources while also supporting broader sustainability goals.

Whether you're a large corporation or a small business, initiatives like EV salary sacrifice help lay the groundwork for meaningful progress toward net-zero targets. By integrating these solutions into your sustainability strategy, businesses can meet their environmental commitments, enhance eligibility for public tenders, and contribute to a greener future.

Overcoming Concerns with Electric Vehicles

While there are some challenges when it comes to adopting EV salary sacrifice schemes, many employees are eager to make the transition to electric vehicles. For those who are hesitant, concerns often stem from issues like vehicle range and charging accessibility. However, the reality is that electric vehicles are the future, whether we like it or not, and they are quickly becoming the standard.

Many modern electric vehicles now offer ranges of 300-400 miles per charge, with some models exceeding 400 miles. This makes range anxiety much less of a concern. As for charging, one way to alleviate employees' worries is by providing charging points at the workplace, which can be a great incentive. The government is currently offering grants for installing workplace charging points. (https://www.find-government-grants.service.gov.uk/grants/workplace-charging-scheme-2)

Moreover, the UK’s public charging infrastructure is expanding rapidly. As of December 2024, there are 73,699 electric vehicle charging points across 37,011 locations. This growth helps ease concerns around charging. Additionally, electric vehicles, especially brand-new models, significantly reduce maintenance and running costs compared to traditional vehicles, making them a cost-effective choice for businesses and employees alike.

Get in Touch

If you would like to learn more about how salary sacrifice can benefit you and your business, or if you would like to hear more from our team, we are always happy to have a conversation. Call us at 0800 032 1433 or email us at [email protected].