8 Sep 21

UK tax rise hits company cars and helps salary sacrifice

The cost to businesses of providing company cars will rise in the UK, following the announcement of an increase in the tax paid by employers on non-cash benefits, announced this week by Prime Minister Boris Johnson.

The increase will see employer National Insurance Contributions (NIC) rise to 15.05% from 13.8% on any non-cash benefits provided to employees. The 1.25 percentage point increase, justified by the Government to provide more funds for the National Health Service and social care, equates to a 9% rise in employer NICs on company cars, and will take effect from April 2022.

Employer NICs are based on a vehicle’s benefit in kind tax band and its P11D value (its official taxable benefit). In the most recent figures released by the UK Government, NIC revenues from company cars totalled £750 million (€874 million) in the 2019/20 financial year.

PwC view

Laurence Simms, employment tax specialist at PwC, said: “The announcement of the new ‘Health and Social Care Levy’ will have a financial impact for those employers that provide non-cash benefits to their employees, such as company cars and vans.”

The increase in the NIC rate provides another incentive for employers to operate electric vehicles, as battery-powered company cars currently incur a benefit charge of only 1% of their official price, a significantly lower percentage than the charge applied to any car with an internal combustion engine.

Boost to salary sacrifice schemes

The tax rise also gives a boost to salary sacrifice schemes, which see employees ‘pay’ for benefits, such as a company car, by agreeing to give up part of their cash pay. This reduces an employee’s gross income, but increases their net take home pay by more than if they received the benefit outright from the employer.

“The Government has decided that the new Health and Social Care Levy will be assessed based on an employee’s National Insurance assessable earnings,” said Simms. “Meaning for any employee participating in a salary sacrifice arrangement, this will effectively reduce their total income accessible to the new Levy, resulting in both a saving for the employee and employer for participating in the salary sacrifice for the non-cash benefit.”

The higher NIC rate will apply from April 2022, following which a separate ‘Health and Social Care Levy’ will start from the 2023/24 tax year. Simms added that the Government has not yet confirmed whether the new increase will only apply to non-cash benefits provided in the 2022/23 tax year or will also apply from the 2023/24 tax year under the new separate levy scheme.


Image: Shutterstock

Authored by: Jonathan Manning