Electric and low emission vehicles have become the buzz word in the world of company vehicles over the last few years, with both employers and employees keen to obtain the tax advantages available, whilst also eager to promote an environmentally friendly approach to the conduct of their business.
Salary Sacrifice – What is it?
Where an employer provides an employee with a company vehicle (with the employer bearing the cost of the company vehicle), the respective employee is assessed, for Income Tax purposes, on the “benefit in kind”.
There is, however, an alternative to this arrangement, whereby the employer looks to provide the company vehicle to its employee via a “salary sacrifice arrangement”. A salary sacrifice arrangement is an agreement to reduce an employee’s entitlement to cash pay, usually in return for a non-cash benefit.
Salary Sacrifice – Electric/Low Emission Vehicle
A salary sacrifice arrangement, for a company vehicle, would see an employer entering a contractual agreement with a lease car company, with this vehicle then being provided to their employee. At this point, the cost of the lease to the employer is offset against the saving made by reducing their employee’s gross pay.
What is usually unattractive with this arrangement, however, is the method of determining the benefit in kind which is reported on the P11D for the employee. Under optional remuneration rules (which apply to salary sacrifice arrangements), where an employee chooses a benefit instead of cash pay, the value of the assessable benefit in kind is the greater of the amount of salary given up and the taxable value of the benefit under the normal benefit in kind rules. For an electric or low emission company vehicle, which attracts a very low benefit in kind under the standard calculations, it is highly likely that the assessable benefit in kind would always be the amount of salary foregone. Consequently, an inefficient tax arrangement.
However, the optional remuneration arrangement rules do not apply to cars with CO2 emissions of 75 grams or less per kilometre. Cars with CO2 emissions of 75 grams or less per kilometre continue to be taxed on the cash equivalent of the benefit, without having to make a comparison with the salary foregone. Simply put, the benefit assessable on the employee would be the list price multiplied by the appropriate percentage for the car’s CO2 emissions – currently 2% for 2022/23 tax year for an electric vehicle.
Salary Sacrifice – Cost Benefits
From an employer’s perspective, the benefit of the salary sacrifice arrangement is the reduction in employer’s Class 1 NIC payable compared with the amount of Class 1A NIC the employer is due to pay for providing that company vehicle.
From an employee’s perspective, they can enjoy a company car whilst saving on employee’s Class 1 NIC, as well as Income Tax via the salary sacrifice.
The employee would consequently only pay Income Tax on the reportable cash equivalent of the vehicle, with the employer’s Class 1A NIC being assessed against the same cash equivalent.
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