HMRC clarifies Salary Sacrifice Car Scheme Tax
As reported previously, Salary Sacrifice schemes changed in April 2020 when the government provided further clarification around tax for fully electric, hybrid and other low emission vehicles. Further increasing the attractiveness of getting a new vehicle via a salary sacrifice scheme.
For electric cars, the BiK rate is 0% for the 2020/21 financial year. The rate will rise to just 1% in 2021-22 and 2% in 2022-23. Meaning this tax break could make salary sacrifice an “effectively perfect” perk for drivers who want electric cars.
Previously in 2017 the HMRC clarified that the changes to the tax treatment on salary sacrifice vehicles only applies to the finance rental of the vehicle. This was good news as it meant salary sacrifice drivers will save income tax and employers will save Class 1A NI on the insurance and maintenance elements of the agreement.
Most existing arrangements set up before 6 April 2017 were automatically subject to the new rules from 6 April 2018. If you set up a salary sacrifice arrangement with an employee before 6 April 2017, you can continue to calculate the value of the benefit in the same way until April 2021. Further details available from HMRC.
For vehicles ordered from January 2021
A driver will be taxed on whatever the greatest is between:
a) the Income Tax due on the amount of salary sacrificed on the finance rental of the vehicle, or
b) the Benefit in Kind (BIK) charge on the car, which is determined by the P11D and CO2 emission levels of the vehicle.
A driver will not pay income tax on the amount of salary sacrificed to cover the maintenance and insurance elements in the agreement, saving them money. Even more savings can be had by encouraging employees to opt for low emission vehicles as drivers will only be charged the benefit-in-kind on the vehicle, providing savings for the amount of salary sacrificed.
There are a lot of savings to be found through salary sacrifice for both the employer and the employee.
The main advantage to employers for implementing salary sacrifice schemes are the savings they make in National Insurance Contributions (NICs). Employers pay NIC contributions on employees’ salaries but benefits such as salary sacrifice are exempt.
Employees will also be financially better off as they pay less tax and NIC on their salaries while getting to enjoy a brand-new vehicle that would have cost significantly more through personal or business contract hire.
Tesla Model 3 - for a 40% taxpayer
The monthly cost for a Tesla Model 3 Standard Range Plus with no deposit, for over 36 months and with 10,000 mileage allowance could be roughly £545. Under salary sacrifice for a higher rate taxpayer it would be roughly £427.12 of the wages they would normally see making a monthly saving of £117.88.
If £200 to £250 a month is spent on petrol or diesel, the fuel savings can make a Tesla Model 3 even cheaper to run.
Corsa-E - for a 20% taxpayer
A cheaper electric run-around, on the same profile, such as the Vauxhall Corsa-E, might cost £395 through business contract hire normally, but through salary sacrifice a basic rate taxpayer (20%) would see a monthly reduction in their salary of £283.38 a month. Saving £111.62 a month.
If £100 to £130 a month is spent on petrol or diesel, the fuel savings can make a Corsa-E an even more attractive option.