Electric vehicles are a hot topic in the tax world just now because they attract quite a number of different tax breaks and they are finally starting to enter the mainstream in terms of price point and the variety of different models available.
It is clear that the provision of an electric vehicle to an employee on top of their existing remuneration package would be an attractive proposition, but is it also cost effective if the employee sacrifices part of their salary to be replaced by an electric company car?
Until relatively recently, there was a thriving industry surrounding the provision of benefits under salary sacrifice schemes. These days, however, most salary sacrifice related benefits in kind have been made tax inefficient because they are taxed at the higher of the annual value of the benefit and the level of salary sacrificed. There are, though, still a few exceptions, such as pension contributions, cycle to work scheme and, most interestingly in respect of this article, ‘Ultra-low Emission Vehicles’ (ULEVs).
The definition of an ULEV is currently any car with CO2 emissions at 75g/Km or less, although I suspect that may well come down closer to zero in the near future.
The current level of annual benefit in kind on zero emission electric vehicles is 0% of list price, going up to 1% from 1st April 2021 and 2% from April 2022 and thereafter. Hence, the income tax charge on the employee is very low, which makes this a far more tax efficient option than funding the car out of post-tax income.
Employers pay class 1A national insurance at the rate of 13.8% on the value of benefits provided to employees, so there is a cost to the employer, but it will be insignificant, particularly if the list price of the car is reasonably modest.
There is a further dimension to consider which is the question of whether to lease or buy the vehicle. It is difficult to say which is more attractive from a pure financial perspective because it depends on the deals being offered, but there is a tax angle that pushes us down the purchase route. Vehicles with a CO2 rating of 0g/km attract capital allowances at a first-year rate of 100%. This means that the whole cost can be written off against taxable profits in the year of purchase. Therefore, purchasing an electric vehicle is very tax efficient from a corporate tax perspective.
On top of this, there are also grants and tax breaks available for the installation of EV charging points, both at the business premises and at an employee’s home, although the tax breaks are due to be phased out from April 2023. Care is needed in how installations at employees’ homes are structured financially.
There is then the question of how to determine what the appropriate level of salary sacrifice is. Every situation will be different and there are many variables involved, so it is a complex calculation. There are no doubt online calculators available if you are prepared to commit to a particular purchase route, but that will doubtless be a somewhat blunt instrument. Further advice may be required in this respect.