The Prime Minister recently outlined his ten-point plan for a ‘Green Industrial Revolution’, covering clean energy sources, transport, nature and innovative technologies. The plan is designed to ensure that the UK eradicates its contribution to climate change by 2050. The ten points in the ten-point plan are built around the UK’s strengths, with the fourth point focusing on electric vehicles.
The Prime Minister confirmed that the ban on the sale of new petrol and diesel cars and vans will be brought forward a further five years, taking affect from 2030, which is ten years earlier than originally planned. However, the UK will continue to allow the sale of new hybrid cars and vans that can drive a significant distance without emitting carbon until 2035.
As a result of the above, the Government have provided a landscape in which employers and employees can benefit from significant cost savings, from a tax perspective, when providing and using electric and low-emission Cars.
Historically, employers have used salary sacrifice arrangements to provide benefits to employees. These arrangements are such that employees give up part of their salary in return for a benefit provided by their employer. The part of the salary that is given up is not subject to income tax or National Insurance Contributions (NICs) and the benefit is subject to income tax and Class 1A NICs based on the normal cash equivalent. For cars, this is measured according to the relevant car benefit percentage and the list price of the car.
From 6 April 2017, the income tax and NICs advantages of salary sacrifice arrangements were largely withdrawn as a result of the OpRA rules. These rules ensure that the taxable value of most benefits is measured as the greater of:
However, when these rules were announced, a number of exemptions from the OpRA rules were also announced, with cars with emissions of 75 grams CO2/KM or less being one of them. Cars with CO2 emissions of 75 grams or less continue to be taxed on the cash equivalent of the benefit without having to make a comparison with the salary foregone, which means the income tax and NICs advantages of salary sacrifice arrangements are retained.
Typically, the benefit in kind on the provision of a company car is calculated based on the list price of the car, the date is was registered, its fuel type, its CO2 emissions and, from 6 April 2020, the electric range of hybrid cars. During the 2020/21 tax year, the company car benefit rate was 0% for fully electric cars and for cars registered on or after 6 April 2020 with CO2 emissions of 50g/km or less with an electric range figure of 130 miles or more.
Furthermore, HMRC announced that these rates were to increase by 1% each year until the 2022/23 tax year, where they will be frozen until at least 2024/25. This means that fully electric cars (and hybrid cars with an electric range of over 130 miles) have a benefit rate of 1% in 2021/22 and 2% from 2022/23 to 2024/25. This means that the taxable benefit on a Volkswagen ID.3 could be as low as £296 for 2021/22, costing a higher rate taxpayer just £118 in income tax.
In comparison, a new petrol Volkswagen Golf would result in a taxable benefit of £6,680, costing a higher rate taxpayer £2,672. This is a huge saving of income tax and Class 1A NICs saving for the employee and employer, respectively.
The benefit of electric cars extends to the treatment of the charging of the vehicles too. Where an employer has charging facilities at or near their premises, the cost of employees charging their vehicle is exempt from UK income tax and NICs; nothing is required to be reported to HMRC. This is the case irrespective of whether the electric car is provided by an employer or if it is an employee’s personal vehicle, as well as being irrespective of the nature of the travel the vehicle is used for i.e. both personal and business use.
The income tax and NIC treatment of provision of charging vehicles via alternative methods, i.e. not charging facilities at or near the employer’s premises, changes dependent upon whether the car is owned by the employee or employer, as well as the nature of the journeys the vehicle is used for. We can provide further advice in relation to the income tax and NIC treatment in these scenarios should you require assistance in this regard.
Mileage rates available for business use
Use of an employee’s own vehicle
Mileage Allowance Payments (MAPs) are available to be paid tax-free by employers to employees for the use of their own vehicle for business journeys. An ‘approved amount’ can be paid to an employee per tax year without creating an obligation to report anything to HMRC. To determine the approved amount, the employee’s business travel miles should be multiplied by the rate per mile for their vehicle. The rate per mile can be seen below:
Should an employer wish to pay anything above the ‘approved amount’ for their employees, there will be income tax and potential NICs implications.
Here lies another advantage of electric and hybrid cars, whereby employees can receive the same tax-free amount for using an electric car for business purposes as they can for any other car, despite the typical costs of running an electric car being lower.
Use of company car
Where employees use an employer-provided car for business purposes and pay for the fuel to carry out the journey, the employer can reimburse the employee a tax-free amount up to the Fuel Advisory Rates. Currently, the rates for petrol and diesel cars is 12p per mile. However, for electric cars this drops to 4p per mile, which reflects the lower cost of journeys in electric cars.
As the government push towards the use of electric vehicles, there are clear income tax and NICs saving when providing electric vehicles (and related facilities) to employees.
If you have any queries relating to the employment tax implications of providing a vehicle to your employees, providing charging facilities to your employees or the rates at which you can reimburse business mileage to your employees, please contact Andy Hamman.