Approaching 50% of the UKs total income comes from PAYE. A big chunk of the balance from VAT. Make no mistake, these are the fuels that power our economy.
And with great power comes not only great responsibility but also, it seems, a big slice of complexity. The rules governing employment taxes and NIC have, in the thirty years the author has been working in the area, grown to a point where any rational person should be concerned.
So, to find something simple and cost effective in this space is as unexpected as it is welcome. And that’s where salary sacrifice, and electric cars come in.
The total tax take on salary can be eye watering. Take (say) someone earning £44k per annum in Glasgow and the combined tax and NIC on an extra pound earned is 54.25% AND the employer pays a further 15.05%. That’s a total of 69.3p to the government for every 45.75p the employee gets.
OK so that’s an extreme example, but even on £30k in England, Wales or Northern Ireland, the Government gets 48.3p for every 66.75p the employee gets. That is a lot more than the headline tax rate of 20% might suggest.
On an electric company car, the tax charge is a tiny fraction of that amount, there’s no employee NIC and the employer pays hardly anything. For a £30,000 electric car the total annual tax bill for that person in Glasgow would only be £246. You could easily spend more a year in Starbucks.
And, whilst there are certainly still some environmental challenges to the production of electric cars, electric cars do appear to be the future, so the UK Government positively encourages people to move to electric company cars.
In real terms employees can save up to half the cost of the car, compared (say) to leasing it privately, whilst employer’s NIC savings will often be £1,000 to £2,000 a year (because the NIC on the car is less than the NIC on the salary foregone). And some employers take those savings and pass them back, in all or part, to their employees to make the choice even more attractive to employees.
Car leasing companies know all of this and have been quick to launch schemes. Whilst many focus on larger employers we’re seeing more and more now targeting SMEs.
In broad terms the arrangements are reasonably simple. Car leasing companies understand how to lease and manage cars, and most employers already operate sacrifice for pensions and other key benefits. As ever, though, the devil is in the detail. In particular, you need to keep a beady eye on National Minimum Wage, those sacrifices need to be properly documented and you need to ensure payroll stays on the case.
From an employee’s perspective the sacrifice shouldn’t impact on the ability to borrow for mortgages, etc. Most private pensions schemes are unaffected, although you should always check and certainly some public sector arrangements are impacted. And there may also be impacts on student loan repayments and certain means tested benefits, although as taxable income is reduced, the effect could be positive.
There are certain risks to the employer of implementing such a scheme, such as early termination charges, however obtaining relevant insurances and clear drafting of the scheme policy documents can help to largely mitigate these risks.
We’ve been talking about electric cars but the scheme actually can apply to any car that emits 75g/km or less of CO2. However, the tax charge on these cars are often much higher which dilutes the overall benefit.
How long will this opportunity last? Well the tax rules are confirmed to at least 2025. We could see detailed changes to the way sacrifice works (did I mention the rules are complicated!) but there’s no reason to assume this will happen any time soon given the clear stated desire of the Government to shift from typical internal combustion engines to electric vehicles.
So, the sun is shining, and our recommendation is to make hay.
If you’d like to talk to Harvey or one of his colleagues about Salary Sacrifice for your organisation, or any aspect of your employee benefits offering, please do get in touch by email harvey.perkins@hrux.co.uk.
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