Salary Sacrifice vs Business Leasing: Which Is Right For Your Business?

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Key Insights

• Salary sacrifice schemes allow employees to save up to 50% on electric vehicles through pre-tax salary deductions, while Business Contract Hire (BCH) offers companies flexibility to lease vehicles directly with options for VAT reclaim and tax deductions.
• Salary sacrifice is typically more cost-effective for employees in higher tax brackets (saving 40% on Income Tax and NI), while BCH tends to be better for companies with high corporation tax liability or those needing specialized vehicles for business use.
• The choice between salary sacrifice and BCH depends on specific business needs: salary sacrifice works better for employee retention and environmental initiatives, while BCH offers more flexibility for fleet management, high-mileage business use, and short-term vehicle requirements.

The appeal of environmentally conscious benefits is significant for UK businesses. Research shows that 70% of employees are more likely to work for a company that contributes to a greener planet, making an electric car scheme an attractive proposition for both employee retention and recruitment.

You might wonder if an electric car salary sacrifice scheme is the right solution for your company. In the UK, many business owners are interested in acquiring an EV but may be hesitant to introduce The Electric Car Scheme or similar company electric car scheme options to do so.

In this article, we will compare getting a car through salary sacrifice versus business leasing (business contract hire - BCH). We will focus on the costs involved, highlight key differences, and help you determine which option is the best fit for you and your company.

1. Salary Sacrifice & Business Contract Hire: What Are They?

2. Comparing Salary Sacrifice And BCH

3. Salary Sacrifice vs BCH: Costs Compared

4. Which One Is Right For You?

Salary Sacrifice & Business Contract Hire: What Are They?

Salary sacrifice is a benefit that allows employees to lease a new electric vehicle by giving up part of their pre-tax salary. This reduces their Income Tax and National Insurance contributions, potentially saving them up to 50% on the cost of the car. Employees will have to pay a small amount of Benefit-in-Kind tax (BiK) - in the case of electric cars, the current BiK rate is very low at 3% for 2025/26. At the same time, it helps businesses improve employee satisfaction and retention without any additional costs.

Business contract hire, sometimes known as BCH, is a leasing option that allows companies to rent vehicles for a fixed period, typically between two to five years, by paying a set monthly fee. This arrangement helps businesses manage their fleet costs without the need for large upfront payments. Maintenance and servicing can often be included in the contract, making it a hassle-free option. At the end of the term, the vehicle is returned, avoiding concerns about depreciation or selling the car. This flexible approach helps businesses keep their fleet up to date and manage cash flow efficiently.

Can a sole trader salary sacrifice an EV?

A sole trader cannot use EV salary sacrifice because they do not receive a salary through PAYE. Salary sacrifice schemes only apply to employees on payroll. Sole traders can still claim capital allowances on electric vehicles used for business, but this is a different tax benefit.

On the other hand, owners of small limited companies are eligible for salary sacrifice - as long as their salary is sufficient. Always consult an advisor if in doubt. 

Leasing an Electric Car Through a Limited Company: Your Options

When considering leasing an electric car through a limited company, directors have two main pathways: electric car leasing with salary sacrifice or business contract hire. Unlike salary sacrifice as a sole trader (which isn't possible), limited company directors can benefit from both options.

If you choose to lease a car through limited company via business contract hire, the company holds the lease directly and can reclaim VAT on business use. However, electric car salary sacrifice often provides greater overall savings for individual employees, particularly those in higher tax brackets using The Electric Car Scheme.

Comparing Salary Sacrifice and BCH

The main difference between salary sacrifice is that salary sacrifice is tied to one employee’s lease whereas BCH is a flexible lease held by the employer. BCH gives businesses more freedom for company use and salary sacrifice focuses on saving the employee money through tax-savings.

Let’s have a closer look at the positives and negatives of both:

Salary Sacrifice: Positives And Negatives

Positives	Negatives
Affordability: Employees have access to new vehicles without large upfront. costs or a personal credit check	Lack Of Ownership: Employees do not own the car, but in some cases they can purchase the car at the end of the lease.
Tax Savings: Employees can save on National Insurance and Income Tax, bringing the overall cost down significantly	Restricted Mileage: Employees have to choose an estimated mileage at the beginning of the lease term, meaning there is not as much flexibility as other options
Environmental Benefits: Offering an EV salary sacrifice scheme is a great initiative to get more people driving more sustainably	Employer Has To Be Signed Up: EV salary sacrifice schemes are only available if the employer is signed up to the scheme, which can be a limit to many who want to salary sacrifice an EV
Employee Attraction & Retention: EV salary sacrifice is a great way to boost employee retention and satisfaction by offering this as an employee benefit due to the savings made.	Charging Costs: Much like a petrol or diesel car, the employee will need to pay for charging costs of the car

Business Contract Hire: Positives And Negatives

Positives	Negatives
No Large Upfront Payments: Frees cash for other business needs	Mileage Limits: Contracts usually come with mileage restrictions and exceeding this can incur extra charges
Avoids Risk Of Depreciation: The leasing company handles the vehicle's resale, so there's no concern over depreciation	Long-Term Commitment: Ending the contract early can result in penalties
Maintenance Options: Contracts often include maintenance and servicing which reduces the hassle	Continuous Payments: Businesses are always paying for the vehicles without building equity
Fleet Flexibility: Businesses can regularly update their fleet with the latest models	No Ownership: The business doesn't own the vehicle, so there's no asset at the end of the contract

As you can see in the tables above, the positives and negatives of both BCH and salary sacrifice are very similar with some small nuances.

So, What Are The Key Differences Between Salary Sacrifice And BCH?

We’ve covered the positives and negatives of both, but what are the key differences?

• Cost: The cost of both is dependent on the lease term, annual mileage and any add-ons (such as a home charger if the employee is getting an EV). Generally speaking, salary sacrifice is cheaper but BCH is more flexible for the employer.

• Use: Salary sacrifice is a non-cash benefit for employees to use on a personal basis. Business Contract Hire can be used for both business and personal.

• Who Pays: The employee pays a portion of their gross salary with EV salary sacrifice, whereas with BCH, the business pays for the lease.

• Tax Implications: The employee pays less Income Tax and National Insurance. BCH, the business can offset rental payments against the taxable income and reclaim VAT.

Salary Sacrifice vs BCH: Costs Compared

Below is a cost comparison between leasing a Kia Niro through a salary sacrifice scheme and via Business Contract Hire (BCH), based on the assumption that the individual leasing the vehicle is a 40% taxpayer.

Cost Comparison	Salary Sacrifice	Business Contract Hire
Gross Monthly Salary Sacrifice	£600-£700	NA
Monthly Tax & NI Savings	Up to 50% savings overall (40% on Income Tax & NI, plus 3% BiK rate)	NA
Employer NI Savings	Yes, 13.8%	NA
Net Monthly Cost	£400-£450 (after tax savings)	£500-£600
Ownership	No (lease)	No (lease)
Maintenance	Typically includes	Optional, can be included for an additional fee
VAT Reclaim	No	Up to 100% for business-only vehicles
Flexibility	Employee-focussed, tied to their salary	Business-focussed, flexible for fleet management

Which One is Right For You?

Here are 10 scenarios comparing salary sacrifice and Business Contract Hire (BCH), providing clarity on when one option may be more suitable than the other.

1. High Personal Tax Rate

   Better option: salary sacrifice.
   Employees in higher tax brackets can achieve significant tax savings through salary sacrifice, meaning they will save more money overall.

2. High Corporation Tax Liability

   Better option: BCH
   Companies with substantial profits can benefit from tax deductions available.

3. Environmentally Conscious Company Culture

   Better option: salary sacrifice.
   Salary sacrifice car schemes often incentivise the choice of electric or low-emission vehicles, which aligns with green initiatives.

4. Short-term Business Needs

   Better option: BCH
   When a company needs vehicles for a limited period, BCH offers more flexibility without any long-term commitments.

5. Employee Retention Strategy

   Better option: salary sacrifice
   Offering a salary sacrifice scheme is an attractive benefit to help retain and show employees they are valued within the company.

6. High-mileage (Business Use)

   Better option: BCH
   For companies whose employees drive a high number of business miles, this option may offer better terms and maintenance packages.

7. Diverse Workforce With Different Needs

   Better option: salary sacrifice
   This approach gives employees the choice of cars to suit their individual needs and wants.

8. Streamlined Fleet Management

   Better option: BCH
   This option is a good way to manage vehicles, this option often comes with comprehensive fleet services too.

9. Limited Capital Availability

   Better option: salary sacrifice
   This method doesn’t require an upfront cost from the business, making it suitable for companies who may be worried about their cash flow.

10. Specialised Vehicles Needed

    Better option: BCH
    If a company needs a specific type of vehicle for its operations, BCH will offer more suitable choices and terms

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