How your salary sacrifice scheme works in 2025 – HMRC tax changes explained

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Key Insights

• HMRC has confirmed that when salary sacrifice schemes are properly implemented, all tax benefits remain fully intact. The confusion primarily centred around pension arrangements, not electric car schemes.
• For EV salary sacrifice, the fundamentals haven't changed: 20-50% savings on any electric car through pre-tax salary deductions 3% Benefit-in-Kind rate for 2025/26 (compared to up to 37% for petrol/diesel cars), income Tax and National Insurance savings for both employees and employers.
• No impact on properly structured pension contributions

Salary sacrifice, also known as salary exchange, is an arrangement where employees exchange part of their gross salary for non-cash benefits, creating significant tax and National Insurance savings. However, recent HMRC research has highlighted potential changes that could impact these arrangements.

Following government research into workplace pensions published in June 2025, there has been widespread speculation about potential changes to salary sacrifice schemes. However, it's crucial to understand that electric car salary sacrifice remains completely unaffected and continues to offer the same substantial savings.

Electric car salary sacrifice through providers like The Electric Car Scheme continues to be one of the most tax-efficient employee benefits available. While there may be future discussions around pension salary sacrifice, company electric car schemes are not part of these conversations and remain a secure, cost-effective way to access sustainable transport.

If you're considering an electric car scheme or already benefit from EV salary sacrifice, you can proceed with confidence knowing that the substantial tax advantages that make electric car salary sacrifice so attractive remain fully protected.

How Salary Sacrifice Tax Benefits Work:

• Pre-Tax Deductions: Payments are taken from your gross salary before income tax and National Insurance calculations

• Reduced Tax Liability: Lower gross salary means less income tax and National Insurance contributions

• Employer Savings: Employers also save on National Insurance contributions, often sharing these savings with employees

• Benefit-in-Kind (BiK) Tax: Some benefits may attract BiK tax, but rates vary significantly by benefit type

Current Tax Advantages:

For Employees:

• Income Tax Savings: Pay less tax on reduced gross salary

• National Insurance Savings: Reduced NI contributions on salary sacrifice amount

• BiK Benefits: Electric cars attract just 3% BiK tax (until April 2026), compared to 25%+ for petrol cars

• Pension Relief: Current pension contributions receive full tax relief at your marginal rate

For Employers:

• Reduced Employer NI: Savings on employer National Insurance contributions

• Enhanced Benefits Package: Cost-effective way to provide valuable employee benefits

• Post-Budget Advantages: Following the 2024 Budget's employer NI increase, salary sacrifice arrangements became more attractive

Potential Tax Changes Under Review:

HMRC Research Findings:

• Pension Contributions: Proposals to make pension salary sacrifice subject to income tax and National Insurance

• Financial Impact: Could cost employees up to £560 annually and employers £241 (based on £35,000 salary)

• Industry Concern: Over 50 companies surveyed viewed proposed changes negatively

High Earner Tax Considerations:

The 60% Tax Trap (£100,000-£125,140 earnings):

• Effective Tax Rate: Combination of 40% higher-rate tax plus tapered personal allowance creates 60% effective rate

• Salary Sacrifice Solution: Pension contributions via salary sacrifice can help avoid this punitive tax band

• Additional Benefits: Also helps retain childcare benefit eligibility in this income range

Different Benefits, Different Tax Rules:

Electric Vehicle Salary Sacrifice:

• Low BiK Rates: Just 3% for electric cars (rising 1% annually to 9% by 2029)

• Substantial Savings: 20-50% total cost savings through combined tax and NI relief

• All-Inclusive Packages: Insurance, maintenance, and charging typically included

Pension Salary Sacrifice:

• Current Position: Full tax and NI relief on contributions

• Uncertain Future: Under government review with potential changes

• Impact Varies: May affect defined benefit pensions more than defined contribution schemes

Important Tax Compliance Points:

• Minimum Wage Protection: Salary sacrifice cannot reduce pay below National Minimum Wage

• Statutory Benefits Impact: Reduced gross salary affects statutory maternity pay and other earnings-based benefits

• Mortgage Applications: Lower gross salary shown on payslips may impact lending decisions

• HMRC Compliance: All arrangements must meet HMRC's salary sacrifice rules

2025 Tax Planning Considerations:

Given the ongoing HMRC review and recent Budget changes, employees should:

• Review Current Arrangements: Assess existing salary sacrifice benefits before potential rule changes

• Consider Timing: Maximize current tax advantages while rules remain favorable

• Monitor Developments: Stay informed about Treasury decisions on proposed changes

• Professional Advice: Consult tax advisors for high earners or complex situations

Bottom Line: While salary sacrifice currently offers substantial tax advantages, the landscape may change. The Treasury has called speculation about immediate changes "totally speculative," but the HMRC research suggests ongoing government interest in reforming these arrangements.

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Last updated: 29/05/2025

Our pricing is based on data collected from The Electric Car Scheme quote tool. All final pricing is inclusive of VAT. All prices above are based on the following lease terms; 10,000 miles pa, 36 months, and are inclusive of Maintenance and Breakdown Cover. The Electric Car Scheme’s terms and conditions apply. All deals are subject to credit approval and availability. All deals are subject to excess mileage and damage charges. Prices are calculated based on the following tax saving assumptions; England & Wales, 40% tax rate. The above prices were calculated using a flat payment profile. The Electric Car Scheme Limited provides services for the administration of your salary sacrifice employee benefits. The Electric Car Scheme Holdings Limited is a member of the BVRLA (10608), is authorised and regulated by the FCA under FRN 968270, is an Appointed Representative of Marshall Management Services Ltd under FRN 667174, and is a credit broker and not a lender or insurance provider.

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