Electric company cars for employees?

The issue

As mentioned in a previous tax bite electric company cars will become very attractive from 6 April 2020. The benefit in kind rate for 2020/2021 is 0%  which increases to 1% in 2021/2022 and 2% in 2022/2023. Furthermore the normal rules on salary sacrifice do not apply for company cars meaning that the amount sacrificed will not be subject to income tax, despite the fact that there would be no (or very little) tax on the company car.

Example

John earns £100,000 and is thinking of buying a Tesla (electric car) on a contract hire plan which costs £800 per month. Let’s also assume another £2,000 per annum to cover insurance and maintenance, therefore £11,600 per annum.

If John were to fund this car personally in 2020/2021 using post-tax income his personal tax required to do so would be £8,400 comprising £400 of national insurance and £8,000 of income tax. This means that he would effectively have to use £20,000 of gross salary to fund his car.

Say his employer now proposes a deal whereby it will supply the car to John if he forgoes £11,600 of salary. This would be eminently attractive to John as he would enjoy the same car having only needed to sacrifice £11,600 rather than £20,000 of salary. This means he will be better off by £8,400 of salary. It is this simple because he will not have any tax to pay in respect of the vehicle benefit in kind. After tax and national insurance this will leave him £4,872 better off in net terms!

Forbes Dawson comment

Although the above example is certainly thought provoking it perhaps understates the advantages for the following reasons:

  1. The employer will save £1,159 in employer’s national insurance foregone on the salary. If it is particularly generous then it may consider throwing this into the pot for the employer by offering a lower salary sacrifice.

  2. In reality the employer may be able to get a better lease deal than the employee.

  3. The company can also claim 50% VAT back on contract hire costs as well as 100% VAT back on any maintenance costs, which again could be passed back to the employee.

We forecast that there will be an explosion in these kinds of deals when employers and employees wake up to the attractions. The general mantra of  ‘steer clear of company cars’ is becoming more anachronistic each day as the electric car revolution reaches full steam.

Please speak to your main Forbes Dawson contact for details about how we can help in tax-efficiently structuring company car offerings.

 

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