We all know that electric vehicles (EVs) are how you can make a difference to our environment. Now you can save tax as well, by doing a salary swap for an EV car.
Swapping salary for something else is called salary sacrifice, or salary exchange. Done properly it means that the employee pays less tax than they might otherwise – and its even specifically allowed by HMRC! It can be used for all sorts of different things: increased pension contributions, healthcare, gym memberships, childcare, bicycles ….and cars. A 40% taxpayer swapping £400/month for an EV car will save around £138/month or £1,656pa in tax!
What is it?
A salary sacrifice or salary exchange arrangement is an agreement between an employer and an employee to change the terms of the employment contract to reduce the employee’s entitlement to cash pay. This sacrifice of cash entitlement is usually made in return for some form of non-cash benefit … so it is really an exchange of salary for something else.
Salary sacrifice can be financially beneficial for both employer and employee. For example, when part of an employee’s remuneration shifts from cash – on which tax and National Insurance contributions (NICs) are due – to non-cash benefits that are wholly or partially exempt. This is the reason why an employee might be interested and is also a reason for the employer to be interested.
But Beware!
It is important to note that a salary sacrifice arrangement can’t reduce an employee’s cash earnings below the National Minimum Wage – or the employer will get into trouble!
Similarly the employer needs to decide if the salary sacrifice amount is pensionable earnings for paying into the employee’s workplace pension.
How does it work for cars?
The tax an employee pays is on the greater of:
i) the salary sacrificed, or,
ii) the benefit in kind charge on the vehicle.
iii) UNLESS it is a low emission car where the tax charge is on the benefit in kind value! Low CO2 emissions in this context mean 75gm/km or less. This means some petrol or diesel cars, but mainly Hybrids and Electric cars
Also:
i) The employee is not taxed on the amount of salary sacrificed to cover any maintenance, tyres or insurance elements, which can be a tax saver.
ii) The employee is not charged NIC on the salary sacrifice – another tax saver
The principal advantage comes from swapping salary for an EV car. The benefit in kind value of an EV is much smaller than the salary it is swapped for!
Which means that it is often cheaper for the employee to have a salary sacrifice car than to lease it direct from a dealer.
Looking to implement a salary sacrifice scheme – or even do a salary swap for an EV car as we’ve described? Then let us help you do that! Get in touch for more advice today.
