We all know that electric, hybrid and low emissions vehicles are better for the environment, but can they be better for our pockets too?
The simple answer is – yes. When used as part of a salary sacrifice scheme, employers and employees can enjoy tax and NI (National Insurance) savings, as well as cheaper on the road costs too.
Let us explain…
A salary sacrifice scheme is an arrangement that can be offered to employees whereby their cash payment entitlement is reduced, usually in return for a non-cash benefit or BiK (benefit in kind), such as a company car. The arrangement must be agreed by both parties and detailed as part of a contract of employment. This scheme cannot be used to reduce an employee’s earning to below NMW (National Minimum Wage).
Usually when a salary sacrifice is used to provide a company vehicle, the maintenance of the vehicle is a managed by a third-party supplier, ensuring set costs for things such as service, MOT and repair.
When this arrangement is applied to an electric vehicle, the tax and NI contribution benefits are increased. In the 2020/21 tax year, HMRC assigned 0% tax for electric vehicles registered from 6th April 2020. This is set to increase to 1% in tax year 2021/22 and then 2% the year after.
If you compare these rates to that of a petrol or diesel company vehicle, which can be taxed up to 37% depending on their emissions band, you can see how appealing ‘going electric’ becomes. Based on a 40% taxpayer, changing from a petrol company car to an electric car, the saving could equate to well over £100 /month, plus additional fuel savings.
This scheme can be beneficial to employers too, helping to reduce their Class 1A NI contributions and their business mileage reimbursement costs. It also makes companies more attractive as employers, which in turn has a positive impact on recruitment and retention statistics. Add to that the corporate social responsibility and carbon offsetting / environmental goals and it proves to be a win-win situation.
Employees will be given the opportunity to drive a brand-new electric vehicle whilst enjoying reduced income tax and NI contributions with fixed tax-free payments, plus benefit from set maintenance costs and reduced fuel / on the road costs. With no need for a deposit, this option provides excellent benefits without any initial upfront costs. Once again, it’s a win-win situation.
All sounds too good to be true? Well, the thorn in the side of this scheme is currently supply and demand issues when it comes to sourcing a cost-effective electric vehicle. Vehicles are very much in demand and it’s therefore not that easy to obtain certain makes, models and specifications.
The other factor to be considered is the addition of a charging point to your home. Whilst some grants may be available, it’s worth researching this in advance to ensure you’re fully aware of any additional costs.
If you’d like to know more about how making this change could affect you as an employer or an employee, contact one of our tax gurus for expert advice and guidance.
By Michelle Morris on 26/11/2021 06:00:00