Since our recent blog about the electric car tax position, we have been inundated with queries from employers and employees about how electric car salary sacrifice schemes work in practice. So, to summarise, this is how it works: The main advantages of electric cars are as follows:

  • There is now a greater range of electric cars which often exceed the performance of far more expensive petrol vehicles (look at You Tube for a variety of races where the new Tesla 3 takes on a variety of high-performance cars).
  • For the three tax years from 2020/2021, an employee will be taxed on a negligible benefit in kind (1%, 2% and 3% respectively) for company electric cars. This applies to any costs relating to the car, including insurance and the installation of charging points at home or in the office.
  • Importantly, an employee can agree to sacrifice salary in return for the company buying them a car (and insuring it) and they will then pay significantly less tax than would have been payable on the salary.

Most organisations with significant employee numbers are now looking at ways to tap into these benefits and broadly three approaches are being taken here:

Most organisations with significant employee numbers are now looking at ways to tap into these benefits and broadly three approaches are being taken here:

  1. Use as a low-cost employee incentivisation and retention mechanism. Here, all benefits are transferred to the employee.
  2. Employer and employee both end up financially better off with any savings shared between the employer and the employee. In other words, the employer will spend less than the salary would have cost to provide the employee with more than they could have afforded with their net salary.
  3. Most of the benefit is passed to the employee but the employer retains employer NI savings.

Although, this is a very positive opportunity it should be entered into carefully. The following approach should generally be taken:

  1. Work out the policy. This involves determining exactly how generous the company is going to be, i.e. how much gross salary needs to be foregone for every £100 of company car expenditure.
  2. Consider the mechanism for reimbursing employees for their expenditure such as charging and cleaning and link this into payroll.
  3. Create a clear employee communication document.
  4. Ensure a robust agreement is in place to agree the amendments needed to the contract.

This process takes time to implement and employers should be starting it now to get ahead of the curve.

Most organisations with significant employee numbers are now looking at ways to tap into these benefits and broadly three approaches are being taken here:

1. Use as a low-cost employee incentivisation and retention mechanism. Here, all benefits are transferred to the employee.

2. Employer and employee both end up financially better off with any savings shared between the employer and the employee. In other words, the employer will spend less than the salary would have cost to provide the employee with more than they could have afforded with their net salary.

3. Most of the benefit is passed to the employee but the employer retains employer NI savings.

Although, this is a very positive opportunity it should be entered into carefully. The following approach should generally be taken:

1. Work out the policy. This involves determining exactly how generous the company is going to be, i.e. how much gross salary needs to be foregone for every £100 of company car expenditure.

2. Consider the mechanism for reimbursing employees for their expenditure such as charging and cleaning and link this into payroll.

3. Create a clear employee communication document.

4. Ensure a robust agreement is in place to agree the amendments needed to the contract.

This process takes time to implement and employers should be starting it now to get ahead of the curve.

Final comment

We think that this is the biggest employee tax incentive since childcare vouchers and it is much more widely applicable. This is something that simply cannot be ignored by businesses with a significant number of employees. Feel free to speak to your usual Prosperis Adviser should you require further assistance.

Stay Connected

Sign up to our mailing list to receive all the latest news and info from Prosperis straight to your inbox