Benefit in Kind on a UK Company Car and Why Electric Changed Everything

A car provided by an employer and available for private use is a taxable benefit. The UK values it by multiplying the manufacturer's list price, including options and delivery, by a percentage determined by the vehicle's carbon dioxide emissions.

That percentage climbs steeply for petrol and diesel cars, with a diesel supplement for vehicles not meeting the relevant emissions standard. For a conventional car it produces a taxable benefit large enough that taking a cash allowance instead was usually the better answer.

What changed

Zero emission vehicles were assigned a very low benefit percentage, legislated to rise gradually over a long period. The effect on the arithmetic is dramatic, and it becomes more dramatic still when combined with salary sacrifice.

Why salary sacrifice makes it work

The optional remuneration arrangement rules generally prevent salary sacrifice from reducing the taxable value of a benefit. Cars with emissions at or below a low threshold are specifically excluded from those rules, which is what allows the arrangement to function.

Under an electric car salary sacrifice scheme, the employee gives up gross salary to fund the lease. That sacrificed amount escapes income tax and National Insurance. The employee then pays benefit in kind tax on the low percentage of list price. The net cost of the car is substantially below the cost of leasing an equivalent vehicle from taxed income.

1. The saving is largest for higher and additional rate taxpayers, because the sacrificed salary would otherwise have been taxed at 40% or 45%.
2. It is particularly powerful for anyone in the 100,000 to 125,140 pound band, where the personal allowance taper produces an effective marginal rate around 62%. See earning past 100,000.
3. Insurance, maintenance and breakdown cover are usually bundled into the lease, so the comparison with private ownership should include those.
4. The arrangement typically ties you to the employer for the lease term, with early termination charges if you leave.

What to check before signing

• Early termination. What happens if you resign, are made redundant, or take extended leave. Some schemes carry insurance against this and some do not.
• The effect on pensionable pay. Reducing gross salary can reduce pension contributions and other salary linked benefits unless the scheme uses notional pay.
• The effect on statutory entitlements. Maternity pay and mortgage borrowing capacity are both calculated on reduced salary.
• The floor. Salary cannot be sacrificed below the national minimum wage, which limits access for lower paid employees.
• The scheduled percentage increases. The benefit percentage for electric vehicles is legislated to rise, so model the cost across the whole lease rather than the first year.

Vans and pool cars

Vans are treated differently, with a flat benefit charge rather than a percentage of list price, and no charge at all where private use is restricted to ordinary commuting. Zero emission vans carry no benefit charge.

A genuine pool car, available to multiple employees, not ordinarily kept at anyone's home and not used privately, carries no benefit at all. The conditions are strict and the record keeping is the part that usually fails.

The international comparison of company car taxation is in company cars compared.