By Katie Williams, director of Hazlewoods 

Electric company cars are growing in popularity and can be a tax efficient benefit. Further, an employee paying for the lease of an electric car via a salary sacrifice scheme can prove very cost effective.

A salary sacrifice scheme works by an employer entering into a lease arrangement for an electric car, which the employee in return pays for by giving up the contractual right for a corresponding amount of their salary.

The lease cost is deducted before tax and NIC (i.e. from their gross salary). The employee is then taxed on their remaining salary plus tax on the benefit received (known as a benefit-in-kind charge). The benefit for electric cars is not based on the salary given up but is instead based on a set percentage of the list price as prescribed by HMRC. For cars with emissions of less than 50g/km, this is set at 1% of the list price of the car in 2021/22 and 2% for 2022/23.

The employer would also enjoy NIC savings as they will not pay class 1 NIC on the salary foregone and will instead only pay class 1A NIC on the lower benefit-in-kind amount.

Example:

John receives an annual salary of £42,000 and foregoes £250 of this per month under a salary sacrifice arrangement for an electric company car with a list price of £38,000.

John, as a basic rate taxpayer in 2021/22, will save:

Tax at 20% on the salary foregone (£3,000) = £600

NIC at 12% on the salary foregone (£3,000) = £360

Less: Benefit-in-kind of £38,000 at 1% (taxed at 20%) = (£76)

Net tax saving for John = £884

With the benefit-in-kind rate increasing to 2% for 2022/23 but the NIC rate also increasing to 13.25% (following the announcement of the health and social care levy), the net tax saving for John would only reduce slightly to £845.50.

The employer would also save NIC based on the difference between the amount sacrificed and the NIC on the benefit-in-kind:

Employer's NIC saved at 13.8% x £3,000 = £414

Less: employer's NIC on benefit-in-kind at 13.8% = (£52)

Net NIC saving for the employer = £362

Again, this net saving would only reduce slightly in 2022/23 with the increase in benefit-in-kind rates but coupled with the 1.25% increase to employer's NIC rates.

Some caution should be taken when entering into such arrangements and it should be noted that the benefit-in-kind rates are not known beyond 2022/23. HMRC could look to increase these at any time and this will impact the tax savings available to the employer and employee. Benefit-in-kind rates have previously reached as high as 16% for electric cars.

There are also a number of conditions to be satisfied for a salary sacrifice arrangement to be effective and we would recommend that professional advice is sought in advance of entering into such an arrangement.

Other company cars

Salary sacrifice for other cars is not such an attractive option as the possible savings are significantly reduced. New rules introduced from April 2017 apply to cars with CO2 emissions of more than 75g/km such that the employee will be taxed on the higher of:

• the amount of salary sacrificed; and

• the taxable benefit value.

Therefore, even where the taxable benefit is relatively low, the employee will, at a minimum, be taxed on the salary foregone. There is no net benefit to the employer of this arrangement, although there will still be an NIC saving for the employee.

Other considerations

If you want to provide a company car to your employee as a benefit, in addition to their normal salary, an electric or low emission car can still form part of a tax efficient remuneration package.

If the vehicle is purchased outright or under hire purchase, the employer can enjoy 100% first year capital allowances for new electric cars or cars with zero emissions. Where the vehicle is leased, the full cost of rental payments will be deductible for cars with CO2 emissions of less than 50g/km.

The employee will still be taxed on the benefit-in-kind calculated in the same way as discussed above, the rates for which are currently very low for electric and low emission cars. There is also no fuel benefit for pure electric cars and an employer can pay an employee up to 4p per business mile for the cost of electricity without any tax implications.

Further, the provision of a charging point at the workplace and the company car user's home does not give rise a taxable benefit.

For further advice, please contact Hazlewoods director, Katie Williams, on katie.williams@hazlewoods.co.uk or 01242 237661.