In January, the UK government introduced a zero emission vehicle mandate, which requires 100% of new cars and vans to be zero emission vehicles by 2035.
Despite this, electric car sales seem to have been stalling recently – perhaps due to difficult economic conditions with high interest rates.
One way to make electric vehicles more accessible to individuals is to use them in salary sacrifice schemes, as the taxable benefit is low for employees.
While it might seem counter-intuitive, opting into a salary sacrifice scheme for an electric car and taking the pay cut could actually boost an employee’s take-home pay, thanks to reduced Income Tax and National Insurance Contributions (NICs).
Salary sacrifice with an electric car
A salary sacrifice scheme involves an employer making an arrangement with an employee to reduce their pay in return for a non-cash benefit, such as a leased company car.
As a company vehicle would be considered a benefit in kind (BIK), it would still be subject to tax, but at a much lower rate. The employee’s remaining income after the salary sacrifice is deducted will also be subject to less tax and lower NICs.
The tax rate for this benefit is 2% of the electric car’s list price, but it will increase by 1% per year over the next few years – reaching a still somewhat reasonable 5% by 2027.
The same can’t necessarily be said for hybrid cars, as the electric range of most models is too low to qualify, resulting in a less attractive rate of 12% that will rise to 15%.
However, this is still much more attractive than the company car tax rates for petrol and diesel cars, which can go up to 37% (though this maximum won’t be increasing).
High marginal tax rates
More employees are beginning to face higher marginal tax rates as increasing income pushes them over frozen Income Tax thresholds due to fiscal drag.
While the basic rate is 20%, the higher rate is 40%, and the additional rate is 45%, there is also a marginal rate of up to 60%
due to the tapering away of the tax-free Personal Allowance on annual earnings between £100,000 and £125,140.
However, if – for example – an employee with a salary of £125,000
sacrificed £10,000, and their employer provided a £40,000
electric car with costs covered by the employer’s lease arrangements, then the employee would pay £6,200 less in tax and NICs, while only paying £480
tax on the company car as a benefit.
In comparison, if they chose to lease the electric car personally, covering similar leasing costs would take nearly £26,000 of the employee’s gross pay.
Benefits for employers
Hiring an electric car through a salary sacrifice scheme seems worth it for employees, but what about the employers managing the leasing arrangements?
An employer will also benefit from providing an electric car to an employee, as they will also pay less tax on the electric car and reduced NICs for the employee, on top of potentially receiving a corporate discount for the lease.
Additionally, offering electric car salary sacrifice arrangements with the aforementioned benefits for employees can help employers to both attract and retain staff.
Whether you’re an employee or an employer interested in a salary sacrifice scheme, you may want to seek professional guidance on the tax implications of such an arrangement, or get help with managing your accounts.
If this is the case, gbac has a team of accountants in Barnsley who can assist you.
To find out more about our payroll and tax consultancy services, reach out by calling 01226 298 298, or send an email to info@gbac.co.uk
and we will get in touch.