Analyses
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.

Richard Cox, Arval UK Consultant, said: “The change in NI improves the position of low carbon vehicles relative to others, so while there is an increase for EVs, it is much lower than for PHEV and much, much lower than for ICE.”

Typical figures were produced by the sustainable fleet and mobility company showing that for a £40,000 internal combustion engined (ICE) car, the monthly increase in employers’ NI paid on benefit in kind (BIK) taxation will be £11.67, whereas for a £45,000 petrol hybrid electric vehicle (PHEV), it will be £5.62, and for a £50,000 electric vehicle (EV), just £1.04.”

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.”

Arval has seen a sharp increase in the number of companies offering their staff a salary sacrifice scheme, and the latest tax changes will boost uptake, said Cox.

“The NI increase does also make salary sacrifice schemes based around EVs even more attractive for both employers and employees. Employers will save on NI payments on salaries alongside a much lower charge on the BIK element, while employees will save more NI although there is no corresponding NI charge on the BIK,” he said.

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.

 

Image: Shutterstock

Authored by: Jonathan Manning