Tax Implications for Electric cars
Are Electric cars - worth the costs?
With climate change and cost of living rises high on the list of employee concerns, is it time to look at an electric company car policy? Would such a scheme really bring any benefits?
Background Company cars have fallen out of favour in recent years as tax charges have risen and the optional remuneration arrangement changes (salary sacrifice) in April 2017 made company cars with emissions over 75g/km less attractive. Is it now time to revisit low emission cars provided through an optional remuneration arrangement, particularly electric cars given the favourable tax treatment they attract, and that they are better for the environment?
Benefit in kind charge For tax year 2021/22 a car that is 100% electric attracts a benefit in kind charge of just 1% of list price. This rises to 2% for each of the next three tax years. This charge covers all the costs incurred by the company in connection with the car except the provision of a chauffeur, or the payment of any fines, penalties or parking charges liable on the employee, but paid by the employer.
Additional benefits Employers can also provide the following without any benefit in kind charge: insurance, maintenance, installation of a charging point at work, installation of a charging point at the employee’s home, provision of a charge card to allow access to charging points and the ability to recharge at work for free or anywhere that the bill for the electricity is paid by the employer, e.g. where charging points are provided in a business park for all businesses.
Salary sacrifice? Benefit in kind tax rates and the ability to charge the car with no fuel benefit charge is a very attractive prospect for the employee, particularly if you are inclined to provide additional benefits over and above the car itself. Whether it’s just a car that is being provided or a suite of additional benefits, it makes sense to consider offering electric cars via a salary sacrifice arrangement. Timely. This will be even more attractive in April 2022 given the rise in employers’ and employees’ NI as the savings would amount to 13.25% for an employee on standard rate NI and 15.05% for the employer, plus an additional 0.5% if the employer is liable to pay the apprenticeship levy. Care is needed Whilst it’s a win-win for both employer and employee in introducing an electric car salary sacrifice, it must be done in a compliant way. In a sacrifice arrangement the ownership of the car remains with the employer, regardless of whether it is being leased or purchased by the employer and the employee reduces their contractual cash pay in exchange for the provision of this benefit in kind. They are not buying the company car, it is being provided by the employer in exchange for a reduction in cash salary which must be documented as a contract change that lasts at least twelve months and is put in place and dated before the payday when the reduction in pay takes effect. On the payslip the reduction in salary must be shown as a reduction on the gross pay side of the payslip, not a payment on the net pay side. What else to consider? With the increase in national minimum wage (NMW) rates in April and the fact that employees may already have entered into salary sacrifice arrangements, for pensions for example, it’s important that before you agree to any further salary sacrifices in respect of an electric car this does not reduce the hourly rate of pay below the relevant NMW rate. The prohibition on salary sacrifice reducing pay below the NMW applies equally to salaried staff as those on hourly rates and the hourly rate cannot be established unless you are accurately recording all the hours that the employees are working (particularly salaried staff working at home).
With the increase in NI rates in April 2022 combined with the attractive tax rates for fully electric company cars, it’s sensible to offer electric cars via salary sacrifice. You would provide the car in exchange for a reduction in cash salary which must be documented as a contract change that lasts at least twelve months and is put in place and dated before the payday when the reduction in pay takes effect.