Tax Guides

Please take a look at our Capital Allowance guide or reach out to one of our team of specialists for more specific information.

Running a fleet salary sacrifice scheme offers tax-efficient benefits for both employers and employees, especially when the scheme includes ultra-low emission vehicles (ULEVs) like electric cars. Here’s a breakdown of the tax implications for employers and employees:

1. Tax Implications for Employees

• Benefit-in-Kind (BIK) Tax: When an employee chooses a company car via a salary sacrifice scheme, they pay Benefit-in-Kind (BIK) tax on the car’s taxable value, based on its P11D value and BIK rate. ULEVs (cars emitting less than 75g of CO₂ per km) have significantly lower BIK rates, especially for electric vehicles (EVs), making salary sacrifice particularly advantageous for employees choosing eco-friendly vehicles.
• Income Tax Savings: By reducing their gross salary in exchange for the car total taxable income is reduced, employees may even fall into a lower income tax bracket, resulting in reduced income tax liabilities. However, this depends on individual circumstances and the amount sacrificed.

2. Tax Implications for Employers

• National Insurance Contributions (NIC) Savings: Since the employee’s gross salary is reduced, the employer’s National Insurance Contributions (NIC) also decrease. Employers pay NIC on employees’ gross salary, so a salary reduction can create significant savings, particularly when multiple employees participate in the scheme.
• Class 1A NIC on BIK: Employers are liable to pay Class 1A National Insurance on the taxable benefit provided to employees through the scheme. For ULEVs, this cost is lower due to the lower BIK rate for these vehicles.

3. VAT Considerations

• VAT on Salary Sacrifice Cars: Employers are generally responsible for paying VAT on the car lease payments, but they can often reclaim part of the VAT if the car is used for business purposes.
• Employee VAT Contributions: If the employee contributes toward the cost of the car (for example, for private use), VAT may be applicable on these contributions, which the employer would need to collect and account for.

4. Additional Pay & Benefit Considerations

• Effect on Pension and Benefits: As salary sacrifice reduces the employee’s gross salary, it may affect contributions to salary-based benefits like pensions, bonuses, or redundancy payments. It’s essential for both employers and employees to be aware of these potential impacts.
• Advisory Fuel Rates (AFRs): For electric vehicles, the Advisory Electric Rate (AER) of 9p per mile (as of 2023) applies, allowing tax-free reimbursement to employees who use EVs for business travel.
• Minimum Wage Regulations: Employers must ensure employees are still paid at or above minimum wage even after the car salary sacrifice payment has been made.

5. Super-Deductions and Capital Allowances

• While employees receive the main tax benefits, employers can also benefit when purchasing vehicles rather than leasing them. For example, purchasing a ULEV allows businesses to qualify for enhanced capital allowances, like the Super-Deduction or First-Year Allowance (FYA), allowing them to write off the car’s value against taxable profits.

6. Other items to Consider

• Whilst salary sacrifice schemes can be a good employee benefit offering there are other factors to consider which should be addressed pre implementation to avoid unforeseen costs at a later date:
• What happens if the employee leaves?
• How does it interact with company car scheme for needs drivers?
• Are all costs rebilled to drivers? Fines, damage etc
• Are drivers benefitting from the best lease rates?
• How are you reimbursing business mileage?

Summary

A salary sacrifice scheme offers substantial tax benefits for both employers and employees, particularly when it includes ULEVs. Employers save on NIC, while employees benefit from reduced BIK rates and lower income tax implications for EVs, making it an attractive option. However, both parties should consider the effects on other salary-linked benefits and ensure compliance with VAT regulations. 

LetsTalkFleet can provide independent impartial advice on the most efficient Salary Sacrifice Scheme for your business so please get in touch with any specific enquiries you have, we are available on 0330 056 3335 or via email contact@letstalkfleet.co.uk .

The information provided is based on existing and proposed legislation as at November 2024 (30th October 2024 UK Government Autumn Statement). Whilst every effort has been made to ensure that information given is accurate and not misleading, this information is intended to provide a quick reference to the current tax regulations relating to company vehicles and how they impact employers and employees. The content has been provided for informational purposes only and should not be relied on as a substitute for professional advice. No responsibility can be accepted by LetsTalkFleet Ltd for any loss or liability occasioned by any person acting on or refraining from action as a result of viewing this information.

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