How your salary sacrifice scheme works in 2025 – HMRC tax changes explained
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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. Following the government's landmark announcement in November 2025, the landscape of salary sacrifice schemes is changing dramatically – but not all benefits are affected equally.
Critical Update: While pension salary sacrifice faces new restrictions from April 2029, electric car salary sacrifice schemes remain one of the UK's most tax-efficient benefits with NO caps or limitations. If you're considering a company electric car scheme or already benefit from EV salary sacrifice, you can proceed with confidence knowing that the substantial tax advantages remain fully protected.
Breaking News: Government Confirms Pension Salary Sacrifice Changes
In November 2025, the government officially confirmed significant changes to how salary sacrifice works for pension contributions. From April 2029, only the first £2,000 of employee pension contributions through salary sacrifice will be exempt from National Insurance contributions (NICs) annually.
This represents a fundamental shift in pension tax relief, but it's crucial to understand what this means – and more importantly, what it doesn't affect.
What's Actually Changing
The government's confirmed policy changes include:
Pension Contributions: Employee pension contributions via salary sacrifice above £2,000 per year will be subject to both employer and employee NICs from April 2029.
Income Tax Relief Continues: All pension contributions, regardless of the amount, will still receive full Income Tax relief subject to usual limits.
Employer Contributions Unaffected: All employer pension contributions remain completely free of NICs with no cap.
Electric Car Schemes Completely Unaffected: Electric car salary sacrifice maintains full tax and NI relief with NO contribution limits or caps.
The government's rationale focuses on fairness, stating that "the costs of relief through salary sacrifice relate disproportionately to pension contributions from those on higher incomes."
What the 2029 Pension Changes Mean for Your Finances
To understand the real-world impact, let's break down how the £2,000 cap affects different salary bands.
Financial Impact by Salary Band
For a £35,000 Salary:
Current situation: £3,000 pension contribution via salary sacrifice saves £600 in NICs
From April 2029: £1,000 above the cap = £120 additional NICs
Annual loss: £120
For a £50,000 Salary:
Current situation: £5,000 pension contribution via salary sacrifice saves £1,000 in NICs
From April 2029: £3,000 above the cap = £360 additional NICs
Annual loss: £360
For a £75,000 Salary:
Current situation: £7,500 pension contribution via salary sacrifice saves £1,500 in NICs
From April 2029: £5,500 above the cap = £660 additional NICs
Annual loss: £660
For a £100,000+ Salary:
Current situation: £10,000+ pension contribution via salary sacrifice saves £2,000+ in NICs
From April 2029: £8,000+ above the cap = £960+ additional NICs
Annual loss: £960+
What Still Works Without Restrictions
Here's the critical distinction: while pension contributions face new limits, electric car salary sacrifice schemes remain completely unlimited and continue to offer:
Full Income Tax relief on the entire salary sacrifice amount
Full National Insurance relief with no £2,000 cap
Low Benefit-in-Kind tax at just 3% (2025/26)
Savings of 20-50% on new electric vehicles
This makes the electric car scheme UK market one of the most attractive salary sacrifice options for 2026 and beyond.
Why Electric Car Salary Sacrifice Is Completely Different
Unlike pension arrangements, company electric car schemes operate under entirely different tax legislation that is not affected by the 2029 pension changes. Here's why:
Different Tax Treatment
Pension Salary Sacrifice:
Subject to new £2,000 NIC exemption cap from 2029
Designed to limit high-earner tax advantages
Focuses on long-term retirement savings
Electric Car Salary Sacrifice:
No contribution caps or limits
Governed by separate Benefit-in-Kind legislation
Actively supported by government to meet green vehicle adoption targets
Classified as a company car benefit with special EV incentives
Government Policy Alignment
The government has made electric vehicles a strategic priority, with policies including:
Ultra-low BiK rates for EVs (3% in 2025/26, rising gradually to 9% by 2029)
Zero-emission vehicle mandate requiring 80% of manufacturers' sales to be zero-emission by 2030
£2 billion investment in EV charging infrastructure
Enhanced capital allowances for businesses
This means salary sacrifice for electric cars is not just protected – it's actively encouraged as a policy tool to accelerate the transition to zero-emission transport.
Unlimited Savings Potential
Consider this comparison for a £50,000 salary:
Pension Contribution (£5,000 annually):
Tax relief: £2,000 (40% Income Tax)
NI savings pre-2029: £1,000
NI savings post-2029: £240 (only £2,000 exempt)
Total annual benefit post-2029: £2,240
Electric Car Salary Sacrifice (£6,000 annually for a Nissan Leaf):
Tax relief: £2,400 (40% Income Tax)
NI savings: £720 (full amount, no cap)
BiK tax: -£180 (3% rate)
Total annual benefit: £2,940 (plus you get a brand-new electric car)
The electric car salary sacrifice scheme delivers higher savings AND provides a valuable asset for daily use.
Strategic Tax Planning for 2026-2029
With confirmed changes taking effect in April 2029, smart employees and employers are already adapting their strategies. Here's your action plan:
Immediate Actions (2026-2028)
1. Maximise Pension Contributions Now
Before April 2029, make the most of unrestricted pension salary sacrifice:
Increase contributions above £2,000 while full NI relief is available
Consider lump sum pension payments if possible
Review your pension vs EV salary sacrifice strategy
2. Establish an Electric Car Scheme
Set up electric car salary sacrifice alongside existing benefits:
No implementation deadline pressure
Start saving 20-50% on EVs immediately
Lock in low BiK rates (3% in 2025/26, 4% in 2026/27)
3. Audit Your Benefits Package
Review all salary sacrifice arrangements with your workplace benefits provider:
Identify which schemes are affected by pension caps
Calculate potential losses from 2029
Plan alternative benefits strategies
Long-Term Strategy (2029 Onwards)
1. Shift Focus to Unlimited Benefits
Post-April 2029, prioritise salary sacrifice schemes without contribution caps:
Electric car salary sacrifice (unlimited)
Cycle to Work schemes (lower value but unlimited)
Childcare vouchers where still available
2. Combine Strategies for High Earners
For those earning £100,000+, the 60% tax trap remains a challenge. Strategic use of both schemes helps:
The 60% Tax Band Problem:
Earnings between £100,000-£125,140 lose personal allowance
Creates effective 60% tax rate
Losing Child Benefit at £60,000+ adds further complexity
Solution: Use the £2,000 pension cap PLUS electric car salary sacrifice:
£2,000 pension contribution (maximises NI-free amount)
£10,000-£15,000 electric car salary sacrifice (keeps income under £100k)
Retains personal allowance worth £2,570 at 40% tax = £1,028 saved
Maintains Child Benefit eligibility where relevant
3. Employer NI Planning
Employers benefit from understanding the changes:
Pension contributions above £2,000 per employee = increased employer NI from 2029
Electric car schemes continue to save employer NI with no caps
Consider salary sacrifice vs business leasing for fleet decisions
Why EV Salary Sacrifice Is Now More Valuable Than Ever
The pension changes make company electric car schemes stand out as exceptional value. Here's why:
One of Few Remaining Unlimited Schemes
After April 2029, most high-value salary sacrifice benefits will face restrictions or have always been limited:
Pensions: £2,000 NIC exemption cap
Childcare: Age-limited and income-restricted
Cycle to Work: Typically capped at £1,000-£3,000
Electric cars: Unlimited, with vehicles available from £200-£1,000+ monthly sacrifice amounts.
Government Actively Supports EV Adoption
Unlike pension changes designed to limit tax relief, EV benefits are deliberately generous:
BiK rates set until 2029 (providing certainty)
Zero-emission vehicle mandate drives manufacturer participation
UK budget tax changes consistently favour EVs
Additional benefits like ULEZ exemptions and parking discounts
Real Savings That Make a Difference
While losing £360-£960 annually on pension NI relief hurts, gaining £3,000-£6,000 annually on electric car costs more than compensates:
Annual EV Salary Sacrifice Savings:
Small EVs like Fiat 500e: £2,500-£4,000 saved
Family EVs like VW ID.4: £4,000-£6,500 saved
Premium EVs like Tesla Model Y: £6,000-£9,000 saved
Plus benefits you can't put a price on:
Zero fuel costs at home (charging overnight)
No congestion charges or ULEZ fees
Lower maintenance costs
Workplace charging often free
Use our EV savings calculator to see your personal savings.
Real-World Impact: Case Studies
Let's examine how the pension changes affect different employees and why electric car salary sacrifice provides the solution.
Case Study 1: Mid-Income Employee – Sarah, £35,000 Salary
Current Situation:
£3,000 annual pension contribution via salary sacrifice
Saves £600 NICs + £1,200 Income Tax = £1,800 total benefit
From April 2029:
Loses £120 annually in NI savings on amount above £2,000
Pension benefit reduces to £1,680
EV Salary Sacrifice Solution: Sarah chooses a Dacia Spring through The Electric Car Scheme at £280 monthly (£3,360 annually):
Tax savings: £672 (20% rate)
NI savings: £403
BiK tax: -£40
Total benefit: £1,035 + she gets a brand-new electric car
Combined with pension (£2,000 cap): Total annual benefits of £2,715
Verdict: More than compensates for pension loss, plus gains a reliable vehicle.
Case Study 2: Higher Earner – James, £65,000 Salary
Current Situation:
£6,500 annual pension contribution via salary sacrifice
Saves £1,300 NICs + £2,600 Income Tax = £3,900 total benefit
From April 2029:
Loses £540 annually in NI savings on amount above £2,000
Pension benefit reduces to £3,360
EV Salary Sacrifice Solution: James selects a Hyundai Kona Electric at £450 monthly (£5,400 annually):
Tax savings: £2,160 (40% rate)
NI savings: £648
BiK tax: -£195
Total benefit: £2,613 + premium electric SUV
Combined with pension: Total annual benefits of £5,973
Verdict: Actually increases total benefits by £2,073 vs current pension-only approach, plus eliminates £1,500+ annual fuel costs.
Case Study 3: High Earner – Maya, £110,000 Salary
Current Situation:
£12,000 annual pension contribution via salary sacrifice
Strategically keeps adjusted income under £100k to retain personal allowance
Saves £2,400 NICs + £4,800 Income Tax + £1,028 retained allowance = £8,228 total benefit
From April 2029:
Loses £1,200 annually in NI savings on amount above £2,000
Pension benefit reduces to £7,028
EV Salary Sacrifice Solution: Maya combines both strategies with a Tesla Model Y at £650 monthly (£7,800 annually):
£2,000 pension contribution (maximises NI-free cap)
£7,800 EV salary sacrifice
Keeps adjusted income at £100,200 (just retains personal allowance)
EV Savings:
Tax savings: £3,120 (40% rate)
NI savings: £936
BiK tax: -£281
Total EV benefit: £3,775
Combined total: £10,803 annually + avoids 60% tax trap
Verdict: Strategic combination delivers £2,575 MORE in annual benefits than pension-only approach post-2029, plus premium electric vehicle and no fuel costs.
How Electric Car Salary Sacrifice Works
If you're new to what an electric car salary sacrifice scheme is, here's how it works:
The Process
1. Choose Your EV Browse from hundreds of electric vehicles, from affordable small electric cars to premium electric SUVs.
2. Calculate Your Savings Your employer deducts the lease cost from your gross salary (before tax), reducing your Income Tax and National Insurance.
3. Everything Included Most salary sacrifice car schemes include:
Full vehicle insurance
Maintenance and servicing
Breakdown cover
Road tax
Often includes home charger installation
4. No Deposit, No Hassle Unlike traditional leasing, there's typically no deposit required and no credit checks for employees.
Tax Treatment Example
For a £500 monthly EV (£6,000 annually) on a £50,000 salary:
Gross Salary Reduction: £6,000 Income Tax Saved (40%): £2,400 NI Saved (12%): £720 BiK Tax Added (3% of £35,000 vehicle): £420 annually (£35 monthly)
Net Monthly Cost: £500 - (£200 tax saved) - (£60 NI saved) + (£35 BiK) = £275
That's 45% less than the headline cost – and this saving applies to ANY electric vehicle value with no caps.
Compare this to the limited savings on pensions post-2029, and the value becomes clear.
Important Considerations for All Salary Sacrifice Schemes
Whether you're using pension or electric car salary sacrifice, remember:
Universal Rules That Still Apply
Minimum Wage Protection: Salary sacrifice cannot reduce your pay below National Minimum Wage.
Statutory Benefits Impact: Reduced gross salary affects statutory maternity pay, paternity pay, and other earnings-based benefits. Read about salary sacrifice early termination for family planning scenarios.
Mortgage Applications: Lower gross salary on payslips may impact lending decisions. Learn about salary sacrifice impact on mortgages.
HMRC Compliance: All arrangements must meet HMRC's OpRA (Optional Remuneration Arrangements) rules.
Why Electric Cars Have Additional Protections
The Electric Car Scheme offers Complete Employer Protection, safeguarding employers from unexpected costs if employees leave during the lease term – a unique benefit not available with other salary sacrifice arrangements.
Frequently Asked Questions
Will the pension changes affect my electric car scheme?
No. The £2,000 National Insurance exemption cap only applies to pension contributions through salary sacrifice from April 2029. Electric car salary sacrifice schemes remain completely unaffected and continue to offer full Income Tax and National Insurance relief with no contribution limits. Electric car schemes are governed by separate Benefit-in-Kind legislation specifically designed to encourage EV adoption.
What exactly is the £2,000 pension cap from 2029?
From April 2029, when you make pension contributions through salary sacrifice, only the first £2,000 per year will be exempt from National Insurance contributions (both employee and employer NICs). Any contributions above £2,000 will be subject to NICs, though all contributions will still receive Income Tax relief. This means if you contribute £5,000 via salary sacrifice, the £3,000 above the cap will incur 12% employee NI (£360) and 13.8% employer NI.
Which salary sacrifice schemes are unaffected by the 2029 changes?
Electric car salary sacrifice schemes are the primary high-value benefit completely unaffected by the pension changes. Other schemes like Cycle to Work also continue unchanged, but these typically involve much lower values (£1,000-£3,000). Company electric car schemes remain one of the few ways to salary sacrifice significant amounts (£5,000-£15,000+ annually) while retaining full tax and NI benefits with no caps.
How much can I save with EV salary sacrifice compared to pension contributions?
For a £50,000 earner sacrificing £6,000 annually: Post-2029 pension contribution saves £2,240 annually in tax relief. EV salary sacrifice saves approximately £2,940 annually PLUS provides a brand-new electric vehicle worth £25,000-£40,000. When you factor in eliminated fuel costs (£1,200+ annually), reduced maintenance, and other benefits, total EV scheme value exceeds £5,000 annually – more than double the pension benefit.
Can I use both pension and EV salary sacrifice together?
Absolutely. Many employees strategically combine both schemes, particularly high earners. The recommended approach post-2029 is to contribute £2,000 to pensions (maximising the NI-free amount) and then use electric car salary sacrifice for additional tax-efficient benefits. This combination helps those earning £100,000+ stay below the threshold where personal allowance tapers, avoiding the 60% effective tax rate.
What happens to my existing pension salary sacrifice arrangement?
All existing pension salary sacrifice arrangements will continue until April 2029 with current rules. From April 2029, employers will need to adjust payroll systems to apply NICs to contributions above £2,000. You don't need to do anything – your employer will make the necessary changes. However, reviewing your strategy now with a financial advisor is recommended.
As an employer, should I still offer pension salary sacrifice?
Yes. While benefits reduce for contributions above £2,000, most employees making typical pension contributions (£2,000-£4,000 annually) will see limited impact. Pension salary sacrifice remains valuable, but consider enhancing your employee benefits package by adding an electric car scheme, which offers unlimited tax benefits and positions your business as forward-thinking on sustainability.
Will BiK rates for electric cars increase like pension restrictions?
BiK rates for electric vehicles are set by government until 2029, rising gradually from 3% (2025/26) to 9% (2029/30) – still far below the 25%-37% rates for petrol and diesel vehicles. These rates are unlikely to change dramatically as the government uses low EV BiK rates as a policy tool to meet zero-emission vehicle targets. Unlike pension changes aimed at restricting tax relief, EV incentives support strategic environmental objectives.
Next Steps: Future-Proof Your Benefits Strategy
The confirmed pension salary sacrifice changes from April 2029 represent a significant shift in UK tax policy, but they also highlight which benefits the government wants to protect and promote. Electric vehicle adoption remains a strategic priority, making electric car salary sacrifice schemes more attractive than ever.
For Employees
Take action now:
Calculate your impact: Determine how much you'll lose in pension NI savings from 2029
Explore EV options: Browse available electric cars and use our savings calculator
Speak to your employer: Ask if they offer or would consider offering an electric car scheme
Plan strategically: Consider combining the £2,000 pension cap with unlimited EV salary sacrifice
For Employers
Position your business ahead of the changes:
Review your benefits package: Identify gaps that EV salary sacrifice could fill
Understand the costs: Electric car schemes typically have no net cost to employers
Support sustainability: Align with ESG goals through green employee benefits
Communicate changes: Help employees understand pension impacts and alternative benefits
Why Choose The Electric Car Scheme
As one of the UK's leading electric car salary sacrifice providers, The Electric Car Scheme offers:
5-star Trustpilot rating with thousands of satisfied customers
Complete Employer Protection from day one – no financial risk if employees leave
Widest vehicle choice – from affordable budget EVs to premium models
All-inclusive packages – insurance, maintenance, breakdown cover, and more
Expert guidance – dedicated support throughout your EV journey
The Charge Scheme – save 20-50% on EV charging costs through salary sacrifice
While pension salary sacrifice restrictions will impact high earners from 2029, electric car salary sacrifice remains one of the UK's most valuable unlimited tax benefits. With 20-50% savings on EVs, 3% BiK rates, and no contribution caps, now is the perfect time to explore how The Electric Car Scheme can help your employees save thousands annually while supporting your sustainability goals.
Ready to discover your savings? Use our instant quote tool to see how much you could save, or book a demo to learn how to implement an electric car scheme for your business.
Please note, The Electric Car Scheme does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors should you require advice.
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Last updated: 01/12/2025
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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