Salary Sacrifice Schemes for Small Businesses (Incl. EV)

Salary sacrifice scheme: cut costs and reward your team without a pay rise

Running a small business can feel like juggling flaming swords on a unicycle. Wages go up, National Insurance bills land, and you still want to look after your people. A salary sacrifice scheme is one of the few tools that can help both sides at once. It can lower your costs and hand your team a valuable benefit, all without a straight pay rise.

It is not magic, and it is not risk-free. So here is the plain-English version: what it is, where it works, the EV scheme everyone is asking about, and the pitfalls that catch employers out.

Hazel, our Chief Wellbeing Officer, is holding out for a salary sacrifice scheme that pays her in walks and biscuits. We are still negotiating.

Quick Answer Box

• Do this: let employees swap part of their gross salary for a non-cash benefit via a salary sacrifice scheme, saving income tax and National Insurance for both sides.
• Best uses for SMEs: pension contributions, electric cars, cycle-to-work, and extra holiday.
• Never do this: drop anyone below the National Minimum or National Living Wage, or set it up on a verbal handshake.
• Write down: a clear, signed contract variation, and explain the knock-on effects on pension, statutory pay, and mortgages.

> Expert view: "A salary sacrifice scheme works best when it is simple, compliant, and clearly explained. Paperwork first, promises second." - Kate Underwood, KUHR

What is a salary sacrifice scheme?

A salary sacrifice scheme is an arrangement where an employee agrees to give up part of their gross salary in return for a non-cash benefit. The sacrificed amount comes out before income tax and National Insurance are calculated.

That has two effects. The employee gets a valuable benefit instead of that slice of cash, often at a lower cost than buying it themselves. And because both the employee and the employer pay National Insurance on a lower salary figure, both can save. HMRC sets out the mechanics in its guidance: Salary sacrifice and the effects on PAYE.

For a small business this is the appeal: you can offer attractive, tax-efficient benefits without adding to your wage bill. Done properly, the employer National Insurance saved on the sacrificed amount can offset some scheme costs.

The schemes that actually work for small businesses

Not every benefit keeps its tax advantage any more. These are the ones that still stack up for SMEs under a salary sacrifice scheme.

• Pension salary sacrifice. The most popular and efficient option. Instead of paying pension contributions from take-home pay, the employee redirects part of gross salary into the pension. Both sides save National Insurance, and the employee's pot grows. Admin is light if your provider supports it. See The Pensions Regulator's guidance on using salary sacrifice for pensions.
• Electric vehicle salary sacrifice scheme. The employer leases an electric car and the employee sacrifices an agreed amount of gross salary to use it. Because EVs have a very low Benefit in Kind, the total cost to the employee is often far lower than buying privately. Demand is high.
• Cycle to Work. A tax-efficient way for employees to get a bike and accessories, with repayments from gross salary. Great for town and city teams.
• Additional holiday. Some employers let staff buy extra annual leave by sacrificing salary. Useful for flexibility, though you need to plan cover and cost.

Quick comparison

Sources: HMRC OpRA rules and GOV.UK guidance linked below.

A closer look at the EV salary sacrifice scheme

This is the scheme generating the most questions right now, so it gets its own section.

The structure is simple. You lease the electric vehicle, usually through a specialist provider that can bundle insurance, maintenance, and tyres. The employee then sacrifices an agreed slice of gross salary in exchange for using the car. Because the sacrifice happens before income tax and National Insurance, and because the company-car tax on EVs is currently very low, the all-in monthly cost can undercut a private lease.

Useful facts you can quote:

• Benefit in Kind for zero-emission cars is 2% of list price in 2024 to 2025, rising by 1 percentage point each year to 5% by 2027 to 2028. Source: GOV.UK Tax on company cars.
• The Class 1 employee National Insurance main rate is 8% from April 2024, while the employer rate remains 13.8%. Source: GOV.UK National Insurance rates.

The wins for a small business are real:

• usually no upfront cost and no large balance sheet commitment
• a benefit that helps you retain and reward people
• a boost to sustainability goals
• light administration once a provider is in place

A word of honesty though. The headline savings depend on the Benefit in Kind rate, which is set by the government and changes over time, and on the employee staying for the full lease. Always check the current EV Benefit in Kind rate before quoting a figure, and agree what happens if someone leaves mid-lease.

The rules you must not break

A salary sacrifice scheme is legitimate and HMRC-blessed, but only if you follow the rules.

• It must be a genuine contractual variation. The employee's actual contractual pay changes. This has to be agreed in writing, not arranged on a verbal nod. Document it clearly and keep the paperwork. See HMRC's manual at EIM42750.
• You cannot sacrifice below the minimum wage. The employee's remaining cash pay must never drop below the National Minimum Wage or National Living Wage for their age. This is a hard line and a common trap. Check the current rates every April: National Minimum Wage rates.
• Most benefits lost their tax advantage. Since the Optional Remuneration Arrangements rules came in from 2017, many salary sacrifice benefits no longer save tax. The main survivors are employer pension contributions, pensions advice, workplace nursery and childcare arrangements, cycle-to-work, and ultra-low-emission and electric cars. If a benefit is not on that list, the tax saving may not exist. Always check current HMRC guidance.

The knock-on effects to flag before anyone signs up

A salary sacrifice scheme lowers the employee's gross pay on paper, and that ripples into other things. Be upfront, because an employee who feels blindsided later is an unhappy employee.

• Pension contributions. If the pension is calculated as a percentage of salary, a lower salary can change the contribution base. Usually managed, but check with your provider.
• Statutory pay. Payments such as Statutory Maternity Pay and Statutory Sick Pay are based on earnings after the sacrifice, so a sacrifice can reduce them. This matters most for staff planning a family or with health concerns. Check current thresholds on GOV.UK and your handbook.
• Mortgage affordability. Lenders assess gross salary, and a sacrifice lowers the headline figure. An employee mid-mortgage-application may want to pause before joining.
• Other earnings-linked entitlements. Some state benefits and life-cover calculations key off salary too.

None of these are reasons to avoid a salary sacrifice scheme. They are reasons to explain it clearly and let people make an informed choice.

How to set up a salary sacrifice scheme: a step-by-step checklist

• Pick the benefit. Start with the schemes that keep their tax advantage: pension, EV, cycle-to-work.
• Choose a reputable provider and check what is bundled in. For EV, nail down insurance, maintenance, and early-termination terms.
• Model the numbers, including the employer National Insurance saving and any admin or provider fees.
• Check the minimum-wage floor for every employee who might join.
• Brief payroll and your accountant so PAYE and reporting are correct.
• Put a clear, written contract variation in front of each participating employee.
• Explain the knock-on effects on pension, statutory pay, and mortgages, in writing.
• Keep the signed paperwork and review the scheme annually.

Common mistakes (and the fix)

• Mistake: setting it up on a verbal agreement.

Fix: always use a written contract variation.

• Mistake: sacrificing below the minimum wage.

Fix: check every employee against the current NMW or NLW rate before they join.

• Mistake: assuming every benefit saves tax.

Fix: stick to the OpRA survivors, and check current HMRC guidance.

• Mistake: not warning staff about statutory-pay and mortgage effects.

Fix: explain the knock-on effects in writing before they sign.

• Mistake: ignoring what happens if someone leaves mid-EV-lease.

Fix: agree early-termination terms with your provider up front.

A short example

A Hampshire design agency with twelve staff introduced pension salary sacrifice and an EV salary sacrifice scheme. On the pension side, the employer National Insurance saved across the team helped offset rising payroll costs, and several employees boosted their retirement contributions for the same take-home pay.

The EV scheme was popular too, but the owner did one thing right that many forget. She sat down with each interested employee, walked through the effect on Statutory Maternity Pay and mortgage affordability, and put it in writing. One employee planning a mortgage chose to wait. No drama, no resentment, because nobody felt caught out.

What to write down for your salary sacrifice scheme

For every arrangement, keep:

• a signed contract variation stating the amount sacrificed and the benefit received
• the start date and the review or end date
• written confirmation that you checked the employee stays above minimum wage
• a written note of the knock-on effects you explained
• the provider's terms, including early-termination terms for EV leases

Bottom line

• A salary sacrifice scheme swaps gross pay for a non-cash benefit, saving tax and National Insurance for both sides.
• The schemes that still work best for SMEs are pension, EV, cycle-to-work, and extra holiday.
• Never sacrifice below the minimum wage, and always use a written contract variation.
• Explain the effects on statutory pay and mortgages before anyone signs up.

Right, what do you do now?

A salary sacrifice scheme is worth exploring, but the documentation, the minimum-wage check, and the conversations with staff are where it goes wrong. That is the sort of thing we can sense-check quickly on the HR Advice Line, or handle as part of ongoing support through HR Protect.

If you want a clear view of whether your benefits and contracts are set up correctly, book an HR Health Check or a discovery call. We will tell you what is solid and what needs tidying up, in plain English. For the tax detail, your accountant should be in the room too.

FAQ

• Is a salary sacrifice scheme worth it for employers?

Yes, if you stick to HMRC-approved benefits, keep people above minimum wage, and document it. Employer NI savings can help offset costs.

• Does a salary sacrifice scheme affect Statutory Maternity Pay?

Yes. SMP is based on average earnings after the sacrifice, so it can reduce the amount. Explain this before sign-up.

• Can directors use a salary sacrifice scheme?

Often yes, but take advice on PAYE, Class 1 NI, and any IR35 or benefit-in-kind angles first.

• Can staff salary sacrifice below the National Minimum Wage?

No. That is a strict rule. You must keep cash pay above the current NMW or NLW.

• How does an EV salary sacrifice scheme work in practice?

The employer leases the car, the employee sacrifices gross pay to use it, and pays Benefit in Kind at the EV rate. The net cost is often lower than a private lease.

• Does a salary sacrifice scheme harm mortgage applications?

It can reduce the gross salary figure lenders see. Staff planning a mortgage may want to delay joining or keep the sacrifice modest.