Company car tax breaks

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September 2010 Company Car Tax Breaks BMW

Offering company car tax breaks is popular in small firms, but it pays to weigh up the benefits and pitfalls

There is a buzz about offering company cars to employees through salary sacrifice schemes. The tax and national insurance contribution (NIC) savings available make the schemes attractive to both employers and staff, especially those on higher income tax rates.

But after closer examination some organisations have spurned these arrangements, unable to justify the complexities and risks of implementing them. Equally, the schemes have been slower to take off among smaller workforces that do not have the buying power to secure manufacturer discounts or interest from leasing companies—many of which prefer to focus on much larger companies.

Ben Creswick, head of business development at leasing firm Zenith Provecta, says: “There is a question as to whether [small employers] will get manufacturer support, which plays an important role in getting costs down even further for employees.”

But company car salary sacrifice can work effectively for organisations with as few as 10 staff (see case study, below). It all depends on the employer’s objectives. In the case of smaller employers, this is more likely to hinge on offering a valuable benefit than making big savings.

David Hosking, managing director at vehicle management firm Tusker, says: “It adds value to the employee reward package, so it is an employee retention tool and perhaps helps control pay increase demands at a time when it is difficult to give pay rises.”

Chris Bolan, head partner at Compass Reward Consulting, adds: “For smaller organisations it is potentially worth it, but a feasibility study is important. It needs to be weighed up carefully so you make your decision with your eyes open.”

The catalyst for car salary sacrifice schemes is the ongoing cut in benefits-in-kind tax on company cars with low CO2 emissions, along with the rising number of well-known makes and models that emit ever-lower CO2 levels. For many, it is more tax-efficient to take a company car than pay income tax and national insurance on an equivalent cash salary.

Bolan advises that if a traditional company car is already in place then it is best to leave the arrangement unchanged and only consider a salary sacrifice scheme for drivers without company cars. “It can be also be attractive for staff who already have company cars and use salary sacrifice for a second car for a family member,” says Bolan. Under salary sacrifice, an employee surrenders part of their salary in return for a non-cash benefit, in this case, a new, fully managed company car. A new employment contract needs to be drawn up and the scheme must run for a decent period of time (this is not legally stipulated, but is usually at least 12 months).

This can affect employees’ pension arrangements and tax credits, so this must be handled with care. For example, pension contributions or payouts may have to take account of employees’ notional rather than actual salary. The change in salary can also alter death-in-service payouts. “We ask our clients to look at their pension scheme rules and whether they can use notional salary,” advises Alastair Kendrick, director at tax firm Mazars.

For the employee, the benefit comes in the savings they make on income tax because they are sacrificing gross income, as well as potential savings on value-added tax and national insurance (which rises from 12.8 per cent to 13.8 per cent in April 2011, making any savings even more attractive). These should all more than offset what they pay in benefit-in-kind company car tax.

But be aware that a car bought in this way is a company car, even if it is primarily driven for personal use. “It is important that employees understand that they will pay [benefit-in-kind] tax. We have had problems with employees thinking it is a personal-use car,” warns Kendrick.

When switching from a personal-use car to a company car staff will also lose any approved mileage allowance payments (Amaps) relief when claiming business mileage. Employees clocking up high mileages in their personal-use car may be worse off under a salary sacrifice scheme. But from the employers’ point of view, under the Corporate Manslaughter Act, it may be better to have such employees in a regularly maintained company car.

A well-constructed salary sacrifice scheme should cost the employer nothing, because the sacrificed amount will normally cover the post-tax, discounted whole-life cost of the car, excluding fuel. The employer may also be able to benefit from NIC savings on the portion of salary that is not paid.

This may be kept by the employer, shared between employer and employee, or passed on to the employee. “About 70 per cent of our clients pass over the NI saving to driver,” says Zenith’s Creswick, but Tusker says most of its clients keep the savings.

Car salary sacrifice schemes can have pitfalls for employers, too. For example, staff can only sacrifice their salary down to the minimum wage. And if they go on long-term sick or maternity leave and can no longer sacrifice the cost of the car, the employer may have to step in and carry that cost.

Employers need to consider what they will do if an employee leaves the company or is made redundant midway through the agreement and the employer is faced with an early termination charge. One solution is to have insurance or a contingency fund in place against such eventualities. Alternatively, they could stipulate staff foot the bill if they leave within a certain period.

Gap insurance can be put in place to mitigate the costs in the event of total loss through accident, fire or theft of the vehicle to cover any shortfall between the motor insurer’s settlement figure and the lease agreement termination charge.

It is important to consider who will handle any administration and whether to use a leasing company. But many larger leasing companies do not tend to work with SMEs. “Typically if the [company] is sub-1,000 employees we will need to levy a fee, which at least covers our basic costs. That is offset against any car orders that are taken on the scheme,” says Tusker’s Hosking.

It can take three to six months for an employer to implement a scheme properly. This includes telling Revenue and Customs what it is doing. Ultimately, whatever the reason for implementing it, a scheme will only work if staff take it up.

Company car tax

  • A company car is taxed according to list price and the CO2 emissions band.
  • The base tax rate is 10 per cent for cars emitting less than 120g of CO2 per kilometre driven (g/km), rising by one per cent in 5g/km increments to a maximum of 35 per cent for high-emitting cars, or those producing 230g/km or above.
  • There is an extra levy for diesel cars.
  • From 2012, the 10 per cent benefit-in-kind band for sub-120g/km vehicles will be abolished and extended to all cars with emissions of less than 100g/km, with the higher bands all increased by one percentage point per 5g/km, to encourage more use of low-emitting vehicles.

Nuts and bolts of salary sacrifice

Surrey-based reward consultancy Redbourne, which has 10 employees, implemented a company car salary sacrifice scheme last year after consulting with staff. Three employees have joined the scheme.

Redbourne chose not to work with a leasing company. “It was much better to do it ourselves with Chris [Bolan, of Compass Reward Consulting] helping,” says Richard Stewart, head of sales and marketing.

The scheme is subsidised by the employer as part of a benefits package and any car taken through it must have CO2 emissions of below 120g/km. Redbourne also only allows staff with at least two years’ service to join the scheme. “That is a risk-mitigation factor from our perspective to try to allow it to be ‘more sticky’; to offer it to employees who are going to be here for the longer term and also as recognition of those people who are developing within the business,” says Stewart.

By Debi O’Donovan

gov.uk/calculate-tax-on-company-cars

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