Salary sacrifice electric car schemes a green win-win

Employers that are struggling to retain staff in the age of the ‘The Great Resignation’ and ‘The Green Revolution’ should look to salary sacrifice electric vehicle schemes. That is the message to reward teams on the back of COP26. How can those schemes help? What are the benefits and what is HR’s role? More on that in a moment.

The background to this is in April 2017 HMRC introduced legislation to remove some of the tax advantages of using salary sacrifice. It was done to help re-dress an unfairness that the Treasury perceives as intrinsic to the use of salary sacrifice as a way of funding employee benefits. However, electric vehicles have been specifically excluded from those measures – not surprising given EVs help the government to meet its targets for CO² reductions by replacing diesel and petrol cars. So EVs have been ‘whitelisted’ by the Revenue which is good news on two fronts – it helps employers build a relationship with the employee whilst at the same time it helps the company move towards ‘net zero’ and demonstrate its ‘green’ credentials. 

So, what about electric vehicles? There are now in excess of 200 electric models in the market with a charge range of around 200 to 300 miles, typically. The Government has recently announced that it is pledging to investment £620 million into grants for electric vehicles and street charging points.

We await to see how the £620m funding will be structured and whether employers will be incentivised further to provide employees with electric vehicles. However, what is clear is that the way in which the company car taxing regime has been restructured reflects the Government’s ongoing commitment to encourage employers to provide EV cars.

So, what about the schemes? Rewards specialist Fleur Benns has been working with a number of clients who are now considering this benefit for the first time. Fleur joined me by phone from London to discuss the pros and cons. I started by asking Fleur how the schemes work.

Fleur Benns: “There are many ways that they can work but, essentially, I think the simplest is that the employer will rent an electric car from a supplier and then the employee enters into a salary sacrifice arrangement, i.e. varying their employment contracts so they give up a portion of their salary, which is obviously taxable to income tax and national insurance contributions, and the employer uses that amount of salary that they no longer have to pay to the employee, to rent the car. In exchange for that sacrifice of salary the employee gets an electric car. So that's essentially how it works. They sacrifice a part of their salary, which is fully taxable to income tax and Class 1 national insurance contributions, in return for an electric car which has much lower tax charge for both the employee and employer.”

Joe Glavina: “So really it’s a way of attracting and retaining staff. Is that the idea?”

Fleur Benns: “Yes, absolutely. I think it's offering something that really enhances that benefits package for employees. It's supporting those employees who want to go green and we've seen all these reports about millennials and the Generation Zs that are coming through, that this is really important to them, that their employers are supporting these green initiatives. So it does that, it supports the company's corporate responsibility goals by providing these electric cars to their employees, or the or at least the opportunity for employees to obtain electric cars which, as we all know, are very, very expensive.”

Joe Glavina: “How expensive is it for companies to do this?”

Fleur Benns: “It is definitely beneficial to both the employee and the employer. As I mentioned earlier, the employee sacrifices a part of their salary which they would already be receiving, and the employer can then use that to rent the car from a supplier. So that cost is covered and where you get the tax saving is that, obviously, there are no Class 1 national insurance contributions to be made in respect of that amount of salary that has been sacrificed, so that's both the saving for the employer and the employee. But when you look at what the employee pays in tax when you enter into a salary sacrifice scheme, and they're quite limited in scope these days, generally you would pay tax on the cash equivalent of the benefit. So the benefit and kind rate or the ‘BIK’ rate as it's referred to, or the amount of salary that's sacrificed, so those are the overriding rules that apply to salary sacrifice. But where you're acquiring, under your salary sacrifice scheme, ultra low emission cars, so your electric or your hybrid cars, those rules don't apply. So the employee only pays tax on the BIK value of the electric car. Now, the benefit in kind rate is actually set by HMRC. This was 0% for the tax year 2021. It is only rising to 1% for the current tax year and then to 2% for the tax year 2022 to 2023. So your basic paying tax of 2% on the value of the car that you're acquiring. So if you're acquiring a car that's worth £40,000 you're just paying tax, from next tax year, 2% of that value. So it's really a tax efficient scheme for employees to be part of.”

Joe Glavina: “The scheme certainly sounds attractive. So why have we not seen much interest until very recently?”

Fleur Benns: “Providing company cars used to be very popular but then the tax benefits were removed. So, I think employers have got out of the habit of providing these sorts of benefits and it might be worth revisiting them now that we have in place these government-backed schemes that persuade people to acquire electric and hybrid cars.”

Joe Glavina: “Last question. How many of our clients are actively looking at offering this?”

Fleur Benns: “There are murmurings around and people are asking about them but I do think this is something that we can be helping our clients with going forward, looking at an overall benefits package and structuring them properly. Salary sacrifice schemes can be tricky to be put in place, you have to make sure you do it properly to get the tax benefits and, therefore, it's something that we can really add value to, in respect of our clients, to make sure that they're done properly.”

On the subject of reward schemes and attracting and retaining talent, Lynette Jacobs has put the case for reviewing reward schemes generally. That is ‘The Great Resignation – time to review reward schemes’ and is available for viewing now from the Outlaw website.