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.
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