Electric company cars will become very attractive from 6th April 2020. The Government has announced that drivers choosing an electric vehicle will pay no benefit-in-kind (BIK) tax in 2020/21. This will increase to 1% in 2021/22 and 2% in 2022/23. Appropriate percentages beyond 2022/23 remain under review and will be announced at future fiscal events.
Furthermore, the normal rules on salary sacrifice do not apply for company cars meaning the amount sacrificed will not be subject to income tax, despite the fact there would be no (or very little) tax on the company car.
John earns £100,000 and is thinking of buying a Tesla on a contract hire plan which costs £800 per month. Let’s 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 2021/22 using post-tax income, his personal tax required to do so would be £8,400 comprising of national insurance and £8,000 of income tax. This means he would effectively have to use £20,000 of gross salary to fund his car.
However, 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 BIK. After tax and national insurance, this will leave him £4,872 better off in net terms.
Although the above example is certainly thought provoking, it perhaps understates the advantages for the following reasons:
- The employer will save £1,159 in employer’s NI foregone on the salary. if it is particularly generous, it may consider throwing this into the pot for the employee by offering a lower salary sacrifice (or into his pension).
- In reality, the employer may be able to get a better lease deal than the employee.
- The company can also claim back 50% VAT on the contract hire costs as well as 100% VAT back on any maintenance costs, which again could be passed back to the employee.
Observers forecast there will be an explosion in these kinds of deals when employers and employees wake up to these attractions. The general mantra of ‘steer clear of company cars’ is becoming more anachronistic each day as the electric car revolution reaches full steam.