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Article

Salary sacrifice for low emission cars

Article

Salary sacrifice for low emission cars

November 25, 2021

2 minute read

It is not very often that we see an opportunity for both employee and employer to benefit from a small relaxation in the tax rules but the rules surrounding salary sacrifice for ultra-low emission cars offer exactly that.

A win win situation

It is not very often that we see an opportunity for both employee and employer to benefit from a small relaxation in the tax rules but the rules surrounding salary sacrifice for ultra-low emission cars offer exactly that.

A salary sacrifice arrangement is an agreement for an employee to reduce the cash pay they receive in return for a non-cash benefit. The tax savings arise from the benefit incurring a lower tax and NIC charge as a result of salary being given up.

Ordinarily the value of the non-cash benefit is the higher of:

  • The amount of salary given up
  • The benefit in kind charge.

However, for cars with CO2 emissions of no more than 75g/km, the charge is always based on the value calculated under the benefit in kind rules.

The benefit in kind charge for ultra-low emission company cars is currently minimal. The charge is calculated based on the CO2 emissions if any, the electric range and the list price of the car.
For example, a fully electric car with a list price of £48,000. 
Here the car has CO2 emissions of 0g/km and the benefit charge would currently be just £480 (1% of the list price) per annum. This benefit will increase in 2022/23 to £960 (2% of the list price) and we currently understand that the rate will be held until 2024/25 but after this the rates can change. It is likely that the rate will increase in the future.
There will also be a charge to employer’s national insurance; currently at 13.8% but increasing to 15.05% from April 2022.
So, for an employee, taxed at the basic rate level of tax of 20% could sacrifice say £400 a month salary and save £960 per annum in tax. The employee and employer NIC yearly saving on this would be £1,114. Based on the above car, there would be a tax charge on the benefit of £96 (£480 x 20%) and national insurance of £66. Taking this all in to account, there is an overall saving of £1,912 per annum.
HMRC have strict requirements as to the legal steps which must be undertaken for this to be effective, including varying employment contracts. In addition, you cannot reduce your salary below the national minimum wage. Any variation of salary will also have an effect on auto-enrolment pension contributions and income for mortgage purposes.

Author:

Delyth Barnett

Personal Tax Consultant

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Author:

Delyth Barnett

Personal Tax Consultant

Need expert advice?

Speak to an expert for advice on
+44-1865 292200 or get in touch online to find out how Shaw Gibbs can help you

Email
info@shawgibbs.com

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