Salary sacrifice: The benefits of electric and hybrid cars
Aug
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.