What is an electric car salary sacrifice scheme?
The scheme works in the same way as other salary sacrifice arrangements, like the cycle to work scheme or a pension scheme.
To provide employees with an electric car salary sacrifice scheme, the company first rents an electric car from a supplier. The employee is then given the option to rent this car in exchange for a part of their salary. The electric car is usually maintained by a third party chosen by the company if it opts for a fully maintained contract, which typically includes routine services, repairs and MOT tests.
If you decide to rent the company car, the employer uses that part of your untaxed salary to pay for the electric car. The amount deducted from your income is before national insurance and tax are applied.
If you decide to rent the company car, the employer uses that part of your untaxed salary to pay for the electric car. The amount deducted from your income is before national insurance and tax are applied.
What is the benefit of electric car salary sacrifice?
There are some great advantages to the electric car salary sacrifice.
Benefits of EV salary sacrifice for employees:
- Brand new electric cars which are otherwise expensive- Income tax and National insurance contributions savings
- Substantially lower cost of car ownership
- Savings on fuel costs
- Fixed, tax-free payments
- Ease and convenience of setting-up the scheme with the help of the company
- No initial upfront costs
- Low BiK rates compared to petrol/ diesel cars
- Getting ready ahead of 2030 diesel and petrol ban
Benefits of EV salary sacrifice for employers:
- Savings on Class 1A National insurance contributions (NIC)- Enhancement to the benefits package offered to employees
- Improved employee recruitment and retention
- A way to support employees who want to go green
- Reduced business mileage reimbursement costs
- Support for corporate social responsibility goals
What rules affect salary sacrifice?
Optional Remuneration Arrangements rules, set by HMRC, affect salary sacrifices schemes offered by employers. These rules are applicable whenever a benefit is provided to employees in exchange for giving up a part of their salary or cash pay.
However, ultra-low emission vehicles offered under the sacrifice scheme are exempt from these rules as long as their CO2 emissions are less than 75 grams per kilometre.
What does the employee need to pay for?
The employee pays for:
- Fixed rental charge (which will be less than the monthly rental fee company pays)
- Electric car’s battery charging costs
- Benefit in Kind (BiK) rates
BiK rate for the financial year 2021/22 has risen to 1%, and the current plan is for this to change to 2% in 2022/23.
- Fixed rental charge (which will be less than the monthly rental fee company pays)
- Electric car’s battery charging costs
- Benefit in Kind (BiK) rates
Electric car BiK rates
Benefit in Kind for electric vehicles in the tax year 2020/21 was 0% for cars registered from 6 April 2020.BiK rate for the financial year 2021/22 has risen to 1%, and the current plan is for this to change to 2% in 2022/23.
On the other hand, petrol and diesel company cars will be taxed at car tax rates up to 37% depending upon the CO2 emissions. The new Worldwide Harmonised Light Vehicle Test Procedure (WLTP) will be used to determine the tax rate for such internal combustion engine cars.
Electric car salary sacrifice example
The salary sacrificed by the employee and the amount contributed by the employer are calculated based on:
- P11D value of the car (list price plus delivery and VAT)
- CO2 emissions
- Benefit in Kind (BiK) rate
- employee’s income tax rate
These figures are used in the following calculations:
1. Start with your company car’s P11D value, e.g. £40,000
2. Multiply the P11D value by the BiK rate (0% in 2020/21)
3. Multiply your car’s BiK rate by the employee’s income tax rate to find the amount of company car tax payable
Example: with a P11D value of £40,000, BiK rate of 0% and personal tax rate of 20%. £40,000 x 0% = £0 (BiK amount) x 0.20 (standing for the 20%) = £0 for the year.
The annual taxable pay will be revised each financial year as the BiK rate changes.
- CO2 emissions
- Benefit in Kind (BiK) rate
- employee’s income tax rate
These figures are used in the following calculations:
1. Start with your company car’s P11D value, e.g. £40,000
2. Multiply the P11D value by the BiK rate (0% in 2020/21)
3. Multiply your car’s BiK rate by the employee’s income tax rate to find the amount of company car tax payable
Example: with a P11D value of £40,000, BiK rate of 0% and personal tax rate of 20%. £40,000 x 0% = £0 (BiK amount) x 0.20 (standing for the 20%) = £0 for the year.
The annual taxable pay will be revised each financial year as the BiK rate changes.
For reference, the income tax rates in 2021-22 will be:
• 0% income tax on income up to £12,570 (personal tax-free allowance)
• 20% income tax on income between £12,571 and £50,270
• 40% income tax on income between £50,271 and £150,000
• 45% income tax on income above £150,001
• 0% income tax on income up to £12,570 (personal tax-free allowance)
• 20% income tax on income between £12,571 and £50,270
• 40% income tax on income between £50,271 and £150,000
• 45% income tax on income above £150,001