Salary sacrifice company cars: What are the tax breaks?

Forthcoming tax changes

From April 2013
The 5% BIK rate threshold will still apply to cars emitting 75g/km of CO2 or less, but the 10% threshold will be narrowed still further, to a maximum of 94g/km. Cars emitting 95g/km upwards of CO2 will attract a BIK rate of between 11% and 35%, with the percentage increasing with each additional 5g/km of CO2 . The 3% diesel surcharge continues.

From April 2014
The 2012 Budget announced the BIK rates for the three tax years beginning April 2014. There will be a one percentage point hike for cars emitting more than 75g/km of CO2, again rising to a maximum of 35%, with the diesel surcharge still applying.

From April 2015
The top rate of BIK tax for the highest-emitting cars will be increased, to 37%, applying to cars emitting 210g/km of CO2 or more. Also, the year-on-year increase in the BIK percentage will move to 2% from the previous 1%, up to the new maximum of 37%.

From April 2016
From April 2016, the government will remove the 3% diesel supplement differential so diesel cars will be subject to the same level of tax as petrol cars. The lowest BIK percentage will be 15% for cars emitting 0-94g/km of CO2.

The chancellor’s recent Budget report outlined changes to the tax treatment of company cars, but salary sacrifice schemes will still offer significant savings

One of the key attractions of a salary sacrifice car scheme is the tax and national insurance (NI) breaks it brings both employee and employer. The employee will save tax and NI on the sum that has been sacrificed, with the value of the car benefit subject only to benefit-in-kind (BIK) tax. Staff also save on the NI they would otherwise have had to pay on that income.

For the employer, the amount of national insurance contributions (NICs) and corporation tax payable is also reduced. Although the employer still has to pay NICs on the provision of the car, this will normally be substantially less than the employer NICs that would have been paid on the salary that has been sacrificed.

Since 2002, tax rates for cars have been split into bands based on their CO2 emissions, in a government effort to encourage more people to switch to lower-emission cars. Those driving cars emitting less CO2 now pay much less BIK, which makes the savings derived from salary sacrifice much more attractive.

But of course the tax landscape is not static. In his Budget report in March, Chancellor George Osborne outlined changes to the tax treatment of company cars. In April, the 76-120g/km 10% BIK-rate threshold was narrowed to 76-99g/km (see box right), which means petrol cars emitting 100g/km of CO2 or more now pay a minimum 11% BIK rate, but cars emitting 1-75g/km of CO2 still attract a 5% BIK rate. The diesel surcharge of 3% still applies.

The BIK rates rise by 1% for every 5g/km of CO2, to 12% for vehicles emitting 105-109g/km and incrementally upwards to a top rate of 35% for cars emitting 220g/km. In subsequent years, some BIK tax band thresholds will be narrowed further (see box below).

Whether the changes will make salary sacrifice car schemes more or less attractive in future is open to some debate.

‘Aggressive adjustments’

Alastair Kendrick, employment tax director at MacIntyre Hudson, says Osborne’s “aggressive adjustments” to BIK rates may lead some employers to question the salary sacrifice model. “Given the rising cost of BIK in cars, is the financial equation in terms of salary sacrifice going to work?”

But others in the industry are more sanguine. Ian Hughes, commercial director at provider Zenith, says: “Changes have been made to the BIK tax bands, but we do not expect these to cause problems for salary sacrifice schemes because, in reality, what the government has done is allow everyone to plan ahead and factor in what is going to happen for the next three years.”

What the Budget changes do emphasise, however, is how important it is for employers to explain clearly to employees the tax structure behind a salary sacrifice scheme and the fact that the tax landscape can change.

Employers must stress that, technically, salary sacrifice is a matter of employment, not tax, law that will change the employee’s terms and conditions. This is because staff must give up their contractual right to the cash they have sacrificed (at least for the term of the lease).

Employers must also get HM Revenue and Customs clearance that the scheme is effective for tax purposes. This can be tricky because HMRC will only sanction live schemes.

Nathan Male, director, global employer services at Deloitte, says: “Any employer-implemented scheme needs HMRC clearance that it is effective for tax purposes. But HMRC will only comment on the paperwork once an employee has participated in the scheme. So some employers put a single employee through the scheme as a test and then seek clearance.”

Employee Benefits

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