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August 23, 2017

Salary sacrifice: The benefits of electric and hybrid cars

Ultra low emission vehicles could offer attractive benefits for employers looking to provide their employees with tax efficient remuneration packages.

New salary sacrifice rules would normally remove the tax advantages of offering employees the use of company cars instead of cash, however ultra low emission cars are exempt from this treatment.

The Salary Sacrifice Rules

The optional remuneration arrangement rules (a.k.a. the “salary sacrifice rules”) were introduced from 6 April 2017 to counter tax and NIC avoidance on certain types of non-cash benefits.

Class 1 NICs for employees and employers are normally due on cash earnings from employment.

However, certain benefits (like car benefit) are not subject to Class 1 NICs and are instead subject to employer’s Class 1A NICs only. This means that there are potential savings that can be made if an employee gives up salary in exchange for a benefit – see Example 1.

Example 1 – Ramesh

Ramesh is a director with salary of £100,000.  Rather that receive his full salary, on 6 April 2017 he swaps £20,000 for use of a company car.  The car has a list price of £50,000 and has CO2 emissions 140g/km therefore his total car benefit is £13,500.

Without Sacrifice (£) With Sacrifice (£)
Salary 100,000 80,000
Car benefit cash equivalent - 13,500
For Ramesh
Income tax 28,700 26,100
Class 1 (Primary) NIC 5,520 5,120
Total tax and NIC 34,220 31,220
Ramesh's saving £3,000
For the company
Class 1 (Secondary) NIC 12,673 9,913
Class 1A NIC - 1,863
Total NIC 12,673 11,776
Company's saving £897

Ramesh and his company could have saved £3,897 of tax and NIC by agreeing to a salary sacrifice arrangement.

The new salary sacrifice rules effectively end this type of remuneration planning by treating the higher of (i) the cash equivalent of the benefit received or (ii) the amount of salary foregone as earnings.

The Benefits of Ultra Low Emission Vehicles

The new salary sacrifice rules do not affect a number of protected benefits including:

  • Cycles and cycle safety equipment
  • Employer contributions to company pension schemes
  • Childcare (including childcare vouchers and employer-provided childcare)
  • Ultra low emission cars (i.e. cars with ≤ 75g/km of CO2)

Therefore electric or hybrid cars can still be used as part of tax efficient remuneration planning.

Low emissions cars also benefit from generous rules about the calculation of car benefit.  This means there will generally be a lower taxable car benefit for a low emission car compared to a high emissions car with the same list price.

Example 2 – Ramesh

Following on from the previous example, Ramesh decides to take a fully electric car instead of the high CO2 alternative on 6 April 2017.

The new car has the same list price of £50,000.  With no CO2 emissions, it has a lower chargeable percentage for the purposes of calculating Ramesh's car benefit (13% for zero emissions cars).  Therefore the total car benefit is only £6,500.

Without Sacrifice (£) With Sacrifice (£)
Salary 100,000 80,000
Car benefit cash equivalent - 6,500
For Ramesh
Income tax 28,700 23,300
Class 1 (Primary) NIC 5,520 5,120
Total tax and NIC 34,220 28,420
Ramesh's saving £5,800
For the company
Class 1 (Secondary) NIC 12,673 9,913
Class 1A NIC - 897
Total NIC 12,673 10,810
Company's saving £1,863

This means that Ramesh and his company can save £7,663 of tax and NIC compared to taking no sacrifice at all.

The generous rules regarding car benefit on electric vehicles mean they also effectively save £3,766 of tax and NIC compared to taking a petrol alternative under the pre-salary sacrifice rules.

The Future of Car Benefits

Data released by HMRC in June shows that car benefits account for 52% of all benefits by taxable value given to employees in 2014/15.

Going forwards, employers may wish to consider utilising ultra low emission cars if they want to continue offering car benefit to their employee’s as part of salary sacrifice arrangements.

Contact us today to discuss your tax requirements.
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