Is it really smooth motoring offering employees electric cars?
Paula Veysey-Smith • 11 October 2024
With the electric car market opening up significantly in the past few years, offering e-cars to your employees through a salary sacrifice scheme can be a highly attractive proposition. With the tax incentives available and purchasing and leasing options, it is important to fully understand how to navigate these to ensure that the promised benefits are enjoyed by both the employer and employee.
Tax Benefits for Employees and Employers
When an electric car is offered through a salary sacrifice scheme, employees can save on both income tax and National Insurance contributions (NIC) because their monthly taxable salary is reduced by the amount of the car payment. Here are the specific benefits:
- Benefit-in-Kind (BiK) Rates: Although the provision of an electric vehicle to an employee still has to be declared as a BiK, currently they have a much lower tax rate compared to traditional petrol or diesel vehicles. For the tax year 2024/2025, the BiK rate for fully electric vehicles is 2%, which means employees pay tax on only 2% of the vehicle's list price. These rates are due to raise going forward but will still remain relatively low.
- Income Tax Savings: By reducing the employee's salary in exchange for the use of an electric vehicle, the amount of income tax paid is reduced, leading to significant savings.
- National Insurance Savings: Both employees and employers save on National Insurance contributions, as these are calculated based on the employee's reduced gross salary.
- Capital Allowances: If the electric car is actually purchased the employer, 100% first year capital allowances can be claimed but only if the car is new or unused. This provides a significant tax relief against trading profits for the employer.
- Zero or Reduced Vehicle Excise Duty (VED): Electric vehicles are either exempt or have a reduced rate of VED (road tax), depending on the vehicle, which gives an added incentive to provide an electric car over more conventionally fuelled vehicles.
Purchasing electric vehicles may not be an affordable option for smaller companies but there are still many benefits to be enjoyed by leasing cars instead. Several options are available to employers who wish to provide electric vehicles to their employees through a salary sacrifice scheme:
- Contract Hire: This is the most popular option. It involves the employer leasing the car from a leasing company for a fixed period (usually 2 to 4 years) and then offering it to the employee. The leasing company handles all aspects of the car's maintenance and the employer pays a monthly fee.
- Finance Lease: With this option, the employer has the flexibility to keep the car at the end of the lease period or sell it. This type of lease will probably include balloon payments (a larger final payment) but can provide more flexibility than contract hire.
- Operating Lease: This is similar to contract hire but usually involves a shorter-term arrangement where it is then possible to return the car if the employee no longer needs it or leaves the company. The car is leased with no option to own it at the end of the term, and all maintenance and servicing can be included for an additional fee.
Additional Considerations
- Maintenance and Insurance: Some salary sacrifice schemes and leasing options include insurance, maintenance, servicing, and breakdown cover as part of the package, making it easier to manage the costs. It is always important to check exactly what the lease will cover.
- Charging Infrastructure: Employers can also consider installing electric vehicle charging points at the workplace. There are additional grants and incentives available for companies that invest in this infrastructure.
Summary of Benefits
- Reduced BiK tax rates for electric vehicles
- Income tax and National Insurance savings for employees
- National Insurance savings for employers
- Potential capital allowances and reduced road tax for employers
- Variety of flexible leasing options available to companies which are tax deductible
Salary sacrifice schemes are a cost-effective way to offer vehicles, especially e-cars, to employees. The tax benefits make them even more attractive for both employers and employees. However, to make the most of all the benefits available it is best to consult an accounting professional before committing to a purchase or lease as it is not as straightforward as the sales people will claim.
Please
contact us if you are considering offering an employee an electric car under a salary sacrifice scheme and we will guide you through all the options available and the tax implications to ensure that you make the best decision for your business.
With many tax payers facing yet another payment to the HMRC on the 31st July let’s answer some frequently asked questions about the Payments on Account System. When was this system first introduced? The Payments on Account system was introduced in the 1996–97 tax year , as part of the Self-Assessment overhaul. Before then, HMRC had a fragmented and less predictable system for collecting income tax from self-employed individuals and others outside the PAYE system. It was introduced to ensure that taxpayers pay tax closer to when they earn their income , rather than facing a large lump sum payment long after the end of the tax year. Why did HMRC introduce Payments on Account? There are three key reasons why HMRC introduced this system: Cash flow for HMRC : This undoubtably is a driving reason for Payments on Account as it spreads the inflow of tax revenue more evenly throughout the year rather than relying on one big payment annually after a tax demand was sent to the tax payer. Encourages prompt payment : Tax is collected in advance (based on the prior year’s bill), reducing the risk of default or late payments. Helps tax-payers budget : Although first going into the Payment on Account system is painful as your tax bill, and half of it again, need to be paid on 31st January. Once in though, it does avoid the shock of a large single tax bill by splitting the liability into two smaller payments. So how does the Payments on Account system work? Who Needs to Make Payments on Account? You’ll need to make payments on account if your tax bill is more than £1,000 and less than 80% of your tax is collected at source (e.g., via PAYE). When Are Payments on Account Due? There are two payments each year: 31 January – First payment on account for the current tax year 31 July – Second payment on account for the current tax year Each is 50% of your previous year’s tax bill (excluding Class 2 NICs and student loan repayments). Example: Let’s say your tax bill for the 2023/24 tax year is £6,000 . On 31 January 2025 : You pay the £6,000 balance for 2023/24 Plus a £3,000 payment on account for 2024/25 (50% of £6,000) On 31 July 2025 : You pay another £3,000 as the second payment on account for 2024/25 So by July 2025, you've prepaid £6,000 towards your 2024/25 tax bill. What Happens When You File Your Next Tax Return? When you submit your 2024/25 return: If the actual tax bill is £7,000 , you’ve already paid £6,000 , so you owe £1,000 by 31 January 2026. If it’s only £5,000 , you’ve overpaid and can get a £1,000 refund or offset it against future payments. If the bill is £7,000 your tax payment will be: on 31st January 26 £1,000 balance on the 2024/25 return bill AND half of the £7,000 (£3 500) balancing payment so £4,500 in total. £3,500 balancing payment on the 31st July 26. Can You Reduce Payments on Account? Yes you can. If you expect your income to fall, you can apply to reduce them through your HMRC online account or on the paper form SA303. But if you reduce them too much, HMRC may charge interest on the underpaid amount. Will Making Tax Digital for Self-assessment change the Payments on Account System? The short answer is No! The longer answer is watch this space!! Many of us professionals believe that with quarterly reporting, quarterly paying will soon follow! For more information on Making Tax Digital for Self-assessment please see our article at: https://www.mpoweraccounting.co.uk/how-will-i-be-affected-by-making-tax-digital-for-income-tax-mtd-for-itsa The Payment on Account system often causes much confusion with self-assessment tax payers. At MPower Accounting we are used to helping our clients understand when payments need to be made and how they have been calculated. As an added service we will always send a payment reminder to clients early in July so they are not caught out. We are also delighted to work with clients who want to complete their self-assessment tax returns early to determine if they are able to reduce the July Payment on Account. Do contact us if you’d like help with Payments on Account and anything to do with your self-assessment
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Do you work from home? If you do, either full-time or part-time, you may be eligible to claim certain expenses either against your own taxes or your Limited Company ones. Many factors will determine what you can claim such as working location, employment status (employee, self-employed, company director), and how much of your home is used for work. What can I claim as an employee of a company? You can claim: A flat-rate allowance of £6 per week (or £26 per month) without needing to provide evidence of expenses. This is the simplest method and can be claimed via your tax code or tax return. The actual costs (if you don't use the flat rate) which can include a proportion of the following: Heating and electricity Internet and phone bills Water (if it’s metered and usage is clearly work-related) You cannot claim rent or mortgage interest unless you're self-employed. These expenses can be claimed via HMRC’s online portal if they have not already been reimbursed by your employer! What can I claim if self-employed (sole trader or via a Partnership)? Here you have two options: 1. Simplified Expenses (Flat Rate) Based on hours you work from home each month: 25–50 hours/month → £10/month 51–100 hours/month → £18/month 101+ hours/month → £26/month 2. Actual Expenses Method You can claim a proportion of: Rent or mortgage interest (not capital repayments) Utilities (gas, electricity, water) Council tax Internet and phone Cleaning and maintenance Home insurance (if work-related) You’ll need to work out the percentage of your home used for business, usually by the number of rooms (not including bathrooms, corridors, storage space) or square footage. One word of warning is never claim the whole use of a room for business as every room will have duality in use. This is also important if you own your home as a room declared purely an office could attract Capital Gains Tax when the property is sold. We suggest that any room should only be claimed at 90% for business. And only one room can be used, not a multiple! These costs should be included on your Self-Assessment tax return. Can I make a claim for these expenses in my Limited Company? Yes, you most certainly can. At MPower Accounting we not only recommend using the actual expenses method as set out above, we provide our clients with a bespoke spreadsheet to calculate these expenses, and others such as mileage, on a month-by-month basis. These amounts can then be claimed as expenses to the Company and paid out to you. It is one of the tax efficient methods of taking money from your business. Capturing and calculating monthly your regular working from home expenses is the best way of ensuring they are recorded correctly. To help you do this we are offering a free download of the spreadsheet usually only available to our clients; please use the link below to get this. Paying taxes is a necessary evil but I am a firm believer in minimising this liability for both individuals and companies. Correctly claiming working at home expenses is one way to reduce your tax bill. Please do contact us if we can help you further identifying all the expenses you can claim and also for further assistance in how to correctly use and populate the downloaded template.
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