Electric Car Salary Sacrifice
The provision of a fully maintained and insured company car as part of a salary sacrifice arrangement became increasingly popular in the decade leading up to 2017. The overall cost to an employee of no longer receiving the salary, plus paying tax on the company car BIK was often lower than leasing the same brand-new car privately. However, recent changes to legislation have impacted car salary sacrifice.
The introduction of the OpRA legislation has had a dramatic impact on the popularity of salary sacrifice for company car arrangements. The government’s stated objectives for OpRA was to remove the income tax and employer’s NIC advantages of salary sacrifice arrangements for most benefits, including cars. Salary sacrifice arrangements for the most popular cars lost much of their financial efficiency and the numbers of cars taken via salary sacrifice arrangements began to fall.
The government did, however, agree with industry lobbying to exempt Ultra Low Emission Vehicles (“ULEVs”) from these rules. Importantly, this exemption maintains the financial attractiveness of salary sacrifice for ULEVs, which are vehicles that emit 75g/km of CO2 or less. ULEVs are typically plug-in hybrid petrol/electric and pure electric cars.
This exemption, coupled with very low rates of benefit-in-kind for electric cars, provides a clear incentive for organisations to consider introducing a car salary sacrifice scheme focussed on electric cars.
Benefits of Electric Car Salary Sacrifice
With the introduction of low rates of company car tax for zero emission electric cars, the result is very low benefit-in-kind (‘BIK’) values for these cars. When compared to the income tax and national insurance that would have otherwise been due on the sacrificed salary, these arrangements can offer employees a financial advantage.
In addition, the employers Class 1A National Insurance liability for a company car is calculated based on the BIK value for the car in question. As noted above, the BIK value for a ULEV can be very low and so there may be a minimal National Insurance cost associated providing a electric company car. In contrast, an employer would pay Class 1 NI in respect of the value of the salary sacrificed which is likely to be much higher than the BIK for the company car. As a result, salary sacrifice for a electric car can generate an NI efficiency for the business that can be kept as a saving, or passed on to employees in the form of a reduced cost.
Some examples of the potential financial benefit to the employee are shown below:
Employee A is a 40% taxpayer and wants to lease a Tesla 3 over three years from her companies’ salary sacrifice scheme.
The monthly benefit-in kind on this vehicle over 3 years is £0, £14 and £29. In total they sacrifice £835 each month from gross salary which equates to £498 per month net from their take home pay. This is saving to the employee of just over £12,000 over 3 years. In addition, their employer saves just short of £4,000 over 3 years (in National Insurance)
Employee B is a 20% taxpayer and wants to lease a Nissan Leaf over 3 years.
The monthly benefit-in kind on this vehicle over 3 years is £0, £5 and £10. In total they sacrifice £439 each month from gross salary which equates to a saving of £141 each month or just under £5,000 over 3 years. In addition, their employer saves just over of £2,000 over 3 years (in National Insurance)
Another financial benefit is the increased buying leverage for an employee as they have access to their organisations bulk buying power. Where an employer provides company cars to employees it can usually negotiate discounts based on the number of cars it will order from a particular provider or vehicle manufacturer.
Generally, the bulk buying power of an employer will result in greater discounts and lower prices for cars when compared to an individual employee on the high-street. Therefore, salary sacrifice arrangements can allow employees not typically entitled to a company car to access the bulk buying discounts of employers.
Salary sacrifice for electric cars can offer an improved Compensation & Benefit offering for employees, which can aid recruitment and retention for the HR function. As these cars are publicly perceived as environmentally considerate, it could appeal to corporate social responsibility agendas, as well as the growing public desire to drive ‘greener’ cars.
An additional non-financial benefit is the additional control of risk from a company vehicle. Many business operators might also consider it more convenient, visible, and controlled to manage individuals driving occasional business mileage in these brand new and fully managed company cars, rather than in private cars. Such an arrangement could reduce the number of “grey fleet” drivers, where management and tracking of health and safety obligations can prove problematic.
Many consider the greatest non-financial benefit to be the environmental benefits. For employees, it is incredibly attractive to be able to access these ‘greener’ cars at much lower cost than in the retail environment, together with fixed corporate insurance and no requirements for personal credit assessments. As these cars are company cars, they will be maintained in accordance with manufacturer guidelines, managed by the car lessor.
For the employer or organisation, this offering can add a new string to their CSR strategy. Zero emission cars offered to the all-employee base is a very positive step in improving the low carbon credentials of your company or organisation and reducing the impact on the local environment of your employees travelling into or out of the office or site.