At the annual conference of the Institute of Car Fleet Management, Colin was appointed an Honorary Fellow of the Institute, entitled to use the designation FICM after his name.
The 8th International Auto Finance Network conference was held in London in January.
Click here to see the video of the event.
If you need a password, it’s autofinance
Article published in Fleet World
Strolling through a leafy London suburb, I happened to notice a parked car onto which someone had written the words “Diesel Danger”. As I had been planning to write about diesels this month this was too good an opportunity to miss, so I whipped out my camera and started taking photographs.
I then noticed Bill Oddie standing next to me (yes, really, and if you are under 30 I’m sorry if you don’t know who I’m talking about). He was wearing a facial expression that said “Who the heck are you and why are you taking photographs of my car?” I introduced myself and explained that I was taking the photos to accompany this article. He said “Will you be able to do anything about the scourge of diesels?” and I said probably not, but I would try. He then smiled and invited me to look at the other side of the car, on which he had written “They said it was safe….”.
He’s right of course, they did tell us diesels were safe. When the tax system was altered to take account of engine emissions, companies changed their car schemes to favour diesels because this was the environmentally-friendly option that saved NI for the employer and income tax and NI for the employee.
The problem was, whilst reducing CO2 would save the planet, an increase in the number of diesel cars would boost the quantity of oxides of nitrogen (NOx) being pumped into the atmosphere, and NOx is a pollutant that kills.
We now have a perfect storm brewing. Diesel is a dirty word, the fuel has no friends in the corridors of power, the Transport Minister has already warned people off buying diesel cars and from 23 October Sadiq Kahn, the Mayor of London, will introduce a £10 toxicity charge for cars, vans, minibuses, buses, coaches and HGVs not meeting Euro 4 standards.
DEFRA lost a High Court case in May as a result of which it was required to publish its draft plans for addressing the problem of nitrogen dioxide. We learned from this that the government likes the idea of local authorities introducing clean air zones (but isn’t too keen on motorists being charged to drive into them), expects Birmingham, Derby, Leeds, Nottingham and Southampton to introduce clean air zones by 2019 and wants dozens more towns and cities to follow suit soon after. The much-discussed diesel scrappage scheme is still being considered, though if introduced it would clearly have to be focussed on removing the most polluting vehicles only otherwise the cost would be astronomical (£60bn were every diesel car and van to be scrapped).
For fleet managers, the key line in the report was buried in clause 54 “The Government will continue to explore the appropriate tax treatment for diesel vehicles and will engage with stakeholders ahead of making any tax changes at Autumn Budget 2017”.
Whilst civil servants are not allowed to speak publicly on matters affecting policy in the run up to the election, the mood music coming out of the corridors of power is not that encouraging for fleet managers. The government urgently wants to reduce the number of diesel cars on the road. As someone told me “They are looking at everything: benefit in kind tax, vehicle excise duty, writing down allowances, AMAP rates, national insurance, everything”.
Whilst sales of diesel vehicles are down 6.4% year on year, there were still more than 400,000 diesel cars sold in the year to end April 2017 and the government thinks this number is too high.
As it happens the blanket “diesel is bad” analysis is a bit unfair on car manufacturers, who have reduced NOx and other emissions in line with the latest Euro 6 standard, which makes new vehicles cleaner than ever before.
|Emissions standard||Applied to new passenger car approvals from||Applied to all new registrations from|
|Euro 1||1 July 1992||31 December 1992|
|Euro 2||1 January 1996||1 January 1997|
|Euro 3||1 January 2000||1 January 2001|
|Euro 4||1 January 2005||1 January 2006|
|Euro 5||1 September 2009||1 January 2011|
|Euro 6||1 September 2014||1 September 2015|
Euro 6 was implemented for new vehicle approvals on 1 September 2014, and all new registrations had to comply with Euro 6 standards from 1 September 2015. So a significant proportion of existing fleet cars now emit very low levels of NOx indeed, as these charts show.
|Euro 5||1.0g/km||0.10g/km||0.06g/km||0.005g/km (direct injection only)|
|0.06g/km||0.005g/km (direct injection only)
|6.0×10 ^11/km (direct injection only)
|Emissions standards||CO:||HC + NOx:||NOx:||PM:||PM:|
|Euro 5||0.50g/km||0.23g/km||0.18g/km||0.005g/km||6.0×10 ^11/km|
However, you can be sure that as more members of public hear the message “diesel is bad” they will be less inclined to buy used diesel cars. This can only reduce residual values and lead to an increase in lease rentals (or depreciation for fleets that buy their cars or fund them via hire purchase).
Which takes us to the key question for fleet managers: given that the government is so keen to discourage the use of diesel cars, how can fleet managers protect their companies (and employees) against rising costs? The obvious answer is to start looking seriously at the alternatives.
Whatever changes the government introduces we can be sure they will still be committed to reducing CO2. The need to reduce global warming isn’t going to go away, so the safe bet is to look for low-CO2 alternatives to diesel-engined vehicles.
And there are a lot to choose from these days.
For example, smaller, petrol-engined cars. Many manufacturers have done a great job in making smaller power units that are lighter but more powerful. Some of these cars deliver very good performance with low CO2 and NOx output.
If you haven’t yet added hybrid vehicles to your fleet, now is the time to consider these. Low emissions, high mpg, proven technology and pretty high residuals (which deliver low rentals). What’s not to like?
You don’t have any plug-in electric cars on your fleet? Range anxiety can be an issue with battery-powered vehicles, but if you analyse the journeys your employees are driving you may well find employees for whom an electric car would work most of the time, except for the occasional journey that could be handled in a rental car or pool car. Most of these cars are still expensive to buy, even with the government grant, but the cost of the fuel is tiny compared with filling up at the pump.
This sort of analysis is valuable at any time but could be particularly valuable now that we know the government has diesel in its cross-hairs. Looking at your attitude to diesel now could make a lot of sense.
Professor Colin Tourick
Article published in Fleet Leasing
Earlier this year the Bank of England initiated a review of the provision of motor finance to UK consumers, instructing the Prudential Regulatory Authority (PRA) to check how resilient lenders’ balance sheets would be in the event of a market downturn and instructing the Financial Conduct Authority (FCA) to look at whether industry practices were harming to consumers.
Very little additional information has entered the public domain since then. The FCA’s ‘Business Plan’ said only that they are “concerned that there may be a lack of transparency, potential conflicts of interest and irresponsible lending in the motor finance industry“, and that it “will conduct an exploratory piece of work to identify who uses these products and assess the sales processes, whether the products cause harm and the due diligence that firms undertake before providing motor finance“.
Some of the newspaper headlines at the time caused a chill wind blow through the boardrooms of fleet leasing and motor finance companies and through the corridors of the BVRLA and FLA. These articles questioned whether the motor finance market was “heading for a crash” or rife with “loan mis-selling”; suggested that that car salespeople “earn thousands of pounds” every time a customer signs an agreement and even wondered whether “mis-sold car finance could be the next PPI scandal”.
On first reading these articles related solely to PCP sold through motor dealers. However, as the initial announcements referred to the sale of motor finance products to consumers, we may assume that this exercise will include the sale of PCH and PCP by fleet leasing companies. FN50 companies are big players in consumer finance, having written 156,000 new PCP and PCH deals last year.
Frankly, some of those press articles were appalling: poorly researched and lacking balance.
The fact is that most of the industry’s customers are very happy with their PCP or PCH agreements. The industry has invested heavily since the FCA arrived: rewriting procedures, recruiting and training staff and reprogramming systems to ensure that customers not only get the products they need and want, but make fully-informed decisions and are treated fairly.
The PRA is responsible for promoting the safety and soundness of financial services companies whilst the FCA is responsible for ensuring that customers are protected.
The PRA’s review will look at what would happen should interest rates rise and GDP fall. Would defaults increase, what would happen to residual values and what effect would this have on lenders?
The FCA will look at whether there is adequate transparency in the market (whether products and firms’ roles are understood by the consumer), whether lending is responsible (i.e. if consumers can afford the financial product and it is suitable for them) and whether there are conflicts of interests (arising, for example, from salespeople earning commission).
The review of the sector was triggered by the Bank of England’s concern that household indebtedness is high and rising relative to incomes, which might potentially cause problems for lenders with lax lending standards.
Household debt was at an all-time high of around 150% of household income just before the financial crash, then fell to around 130%, and it has now risen to around 133%. Of this, three quarters relates to mortgage borrowing.
Dealership car finance has grown by roughly 4.5% pa over the last few years, which suggests that it is rising rapidly. However, there is an issue with these statistics.
Historically, when people wanted to fund their next car purchase they may well have gone into their bank and taken out a car loan. This option is less popular now (in no small measure because of the guaranteed minimum future values and very low interest rates offered by manufacturer captive finance companies). So whilst the stats show that dealer finance is rising this does not accurately reflect the totality of motor finance. It is conceivable that total motor finance has remained static whilst the mix of deals within the total has changed, with more dealer finance and less bank finance.
Similarly, these statistics exclude PCH. A consumer who in the past only bought used cars might well have taken out their first PCH agreement in the last few years, attracted by the low monthly costs compared with repaying capital and interest on a bank loan. It is possible to argue that this change in behaviour is very much to the consumer’s benefit but in the stats it simply looks like one more new car has been sold via a consumer funding agreement.
It is reasonable to assume that the FCA, having dealt with major concerns about payday lenders, are now focussing on the motor finance market primarily because of the size of the market rather than because it is concerned of any specific bad practices it wishes to squeeze out.
The BVRLA and FLA are both actively working to help the regulators understand how the market works and putting forward the industry’s case.
If your company is not active within BVRLA or FLA committees, and you have insights or ideas about how the market might be improved that might be worthwhile presenting to the regulators, now might be an excellent time to discuss these with the trade bodies. It will be far better to present ideas to the regulators now rather than simply waiting for them to bring forward new draft regulations.
These are some of the point that are no doubt being made by the trade bodies to the regulators:
If you have any thoughts on these points or have insights, ideas or data that could help the BVRLA or FLA in their discussions with the regulators, now might be a good time to provide these to them.
Professor Colin Tourick
Article published in Fleet World
Last month’s article was entitled The Finance Bill – a seismic shift for fleet managers and included an explanation of the new Optional Remuneration (OpRA) rules.
That article generated more reader response than we have had in nearly a decade of writing these articles, the general tenor of which can be summed up as “the Government is planning to do wha-aaaaat? Really?”
Given the importance of the Finance Bill we need to return to this topic this month. The changes will affect many fleet managers, quite possibly the majority.
We will look at the proposals again but from a slightly different angle; trying to work out why the government have introduced these changes and thinking about what you as a fleet manager need to be doing now to ensure that your company and your employees don’t end up being disadvantaged.
First let’s reprise what’s actually being proposed.
The draft legislation describes two types of OpRA; Type A and Type B.
Under a Type A arrangement the employee foregoes earnings in return for the benefit. This is the familiar scenario of a typical salary sacrifice arrangement. If an employee sacrificed salary and was given a company car emitting more than 75g CO2/km before 6 April 2017, they will continue to be taxed under the old rules (the normal company car BIK rules) until the earlier of 6 April 2021 or the date they modify or renew the deal. The new rules do not affect cars that emit less than 75g CO2/km – these arrangements continue as before.
Under a Type B arrangement, the employee receives a benefit (such as a company car) rather than some earnings. This is the one that is making people stop and think. You might think that if someone received a company car, the fact that they had been entitled to a cash allowance would become irrelevant and that they should be taxed under the benefit in kind rules for company cars. That’s what happened in the past and it made perfect sense.
However, that’s not what the draft legislation says. It says that if an employee who is entitled to either a cash allowance or a company car opts for the company car, they will be taxed on whichever generates the most tax.
In a few moments we will try (and largely fail) to explain the government’s logic but first we need to mention that the legislation contains safeguards against clever people trying to game the system.
If any OpRA is changed or renewed after 5 April 2017 the new rules will apply from the date of the renewal or change, except where this has been made necessary by a reason outside of the control of the employer or employee. For example, where the car has been written off and has to be replaced. In such circumstances the change will not be regarded as an event that triggers a move to the new rules.
So, to summarise, we now have two different arrangements:
|Applies when…||…employee foregoes earnings and takes a benefit instead||…employee is entitled to a cash allowance but opts to take a benefit instead (e.g. a company car)|
|Example||Car salary sacrifice:
If the car emits more than 75 grams CO2/km the employee will be taxed on the higher of:
· the cash equivalent value of the company car (broadly; list price x the emissions-based CO2 percentage) or
· the amount of salary they sacrificed.
Free fuel salary sacrifice:
Employee agrees to forego some salary and the employer agrees to pay for free private fuel. The employee will be taxed on the greater of:
|If the car emits more than 75 grams CO2/km they will be taxed on the greater of:
· the cash equivalent value of the of the company car or
· the cash allowance foregone
If you want to try to work out why the government has taken this approach to Type B arrangements, it helps to remember that the benefit in kind tax rules were designed to standardise the taxable value when an employee is allowed free private use of their company car. However, in reality they do nothing of the sort. If you and I drive identical company cars and pay income tax at the same marginal rate, but I drive 20,000 personal miles and you drive just 2,000, it stands to reason that I get more personal benefit from the company car than you do. But we still pay the same benefit in kind tax, which is clearly unfair. However, the system isn’t designed to be fair, it’s designed to be simple to administer and to generate a certain amount of money for the government.
Working out the real benefit an individual derives would be an administrative nightmare involving a personal evaluation of the benefit for each employee. However, one might argue that where the employee has the choice between two alternatives they will automatically take the one that is worth the most to them. Therefore, (according to the sort of logic HMRC adopts) if the employee takes the car but the cash allowance is worth more, the employee must value the car at least as much as the value of the cash allowance.
So if I choose a company car that generates a taxable benefit of £200 per month rather than a cash allowance of £300 per month, HMRC will say that I’m placing a value on the car of at least £300 per month and they will tax me on the £300 per month. Ouch.
We can safely assume that these new rules aren’t going to go away, whoever wins the general election. So we have to learn to live with them.
With Type A contracts the situation is clear. If you operate a salary sacrifice scheme you will need to evaluate the net cost of the new rules to the company and to the employees. We have a transition period but this only applies to existing contracts: where there is a new contract the new rules have to be applied. If an employee wants to sacrifice salary for a company car they need to know how much it will cost them. Talk this through with your supplier; they will be able to do the sums for you.
With Type 2 contracts the situation requires more thought. Many company car schemes give the driver the option to take a cash allowance, though in practice most employees chose the company car. But in future the mere existence of the cash allowance option risks creating a tax liability that could be far greater than the benefit in kind tax that the employee would have paid in the past.
Cash allowances have been an important part of flexible benefits schemes for decades. If you offer them, now might be a good time to review whether you should continue, and, if so, the amounts that should be on offer. It could well be that you find that for a whole group of drivers, particularly those who are only allowed to choose from a small range of cars, it might be worthwhile withdrawing the cash option completely.
If you have a group of drivers (say all employees at a certain managerial grade) who are entitled to either a company car (lease rental max say £400 per month) or a cash allowance of say £420 per month, you will find things become complicated. The BIK tax on those cars will vary according to list price and CO2 emissions whereas tax on the cash allowance will be static – and needs to be known by the employee before they order the car, because that’s the amount that will be payable if it’s higher than the BIK.
Most employees are likely to feel mightily aggrieved if they have to pay tax on a cash allowance they have not received, rather than BIK tax on the company car they have received.
Here again a conversation with your leasing company or fleet management supplier will be the order of the day. This stuff is not straightforward.
The aftershocks of the Finance Bill will be felt for some time to come.
Professor Colin Tourick
The 7th annual edition of Company Car and Van Tax has just been published by Eyelevel Books, in conjunction with KPMG, Ogilvie Fleet, Low Cost Vans and Fleet Operations.
To quote Fleet World:
Updated tax book sheds light on salary sacrifice changes
The new rules for salary sacrifice and cash allowances come under the spotlight in the seventh edition of Colin Tourick’s annual tax book for fleet managers.
The latest edition of the tax guide includes coverage of the new rules announced in the draft Finance Bill.
Company Car and Van Tax 2017-18 is fully updated after the March 2017 Budget, including the optional remuneration, salary sacrifice and car allowances announced in the draft Finance Bill. The book also covers everything a fleet manager or company vehicle driver needs to know about tax, including car benefit tax, fuel benefit tax, VAT, income tax, corporation tax, capital allowances, fuel duty, vehicle excise duty and national insurance contributions.
The book is published in conjunction with KPMG, Fleet Operations, Low Cost Vans and Ogilvie Fleet, and is available from amazon.co.uk, tourick.com and all good bookshops., priced at £40 paperback or £33.33+VAT PDF ebook.
21st April 2017
UK Fleet Operators anticipate greater demand for petrol vehicles
The latest ExpertEye Fleet Industry Review highlights a move towards petrol vehicles for UK fleet operators together with a growing demand for alternative fuels.
Produced in association with Professor Colin Tourick from University of Buckingham, ExpertEye’s latest review provides valuable insights into the latest status and views of the UK fleet marketplace. Despite Brexit now a certainty, coupled with the recent election announcement and news of changes to company car taxation in the Spring Budget, the UK economy is not showing signs of drastic change.
Based on a survey of over 200 fleet operators the findings include:-
The ExpertEye Fleet Industry Review is based on a biannual survey of fleet operators which measures their practices and references attitudes and opinions on a wide range of issues:
With trends going back 7 years this report contains a unique insight into the key factors driving fleet acquisition decisions including commentary and analysis from a leading industry expert. The Review contains a summary of the survey and analysis of the results provided by Professor Colin Tourick at the University of Buckingham, on behalf of ExpertEye ag.
ExpertEye offers extensive insight into the automotive market across Europe. Utilising research and key data from leasing providers, vehicle manufacturers, dealers, fleet operators and the drivers themselves, we provide the complete range of business feedback about all aspects of the leasing, buying, maintenance and renewal processes.
For more information please contact email@example.com
Article published in Fleet World
Normally, when the government publishes the draft wording of a Finance Bill, the fleet press and commentators rush to give their thoughts, but that didn’t happen on 20 March when the government published Finance (No. 2) Bill 2016-17, the legislation that enacts the chancellor’s spring budget. They had good reason to hesitate, because the government’s proposals are complex and far-reaching and it seems that everyone has needed to take a little longer to work out what it all means. The key areas fleet managers need to be aware of are that the draft puts flesh on the bones of the new approach to salary sacrifice that was announced in the Autumn Statement and introduces a very different approach to cash allowances.
At least one major accounting firm has suggested that the new rules will also affect Employee Car Ownership Schemes (ECOS) but at the time of writing this is unclear, as is the position when an employee who has the right to a cash allowance instead of a company car selects a company car below their entitlement level, i.e. they ‘trade down’. Trading up was referred to in the draft legislation but not trading down.
This article ignores these uncertainties and concentrates on the things we definitely know.
As the government had already announced, from 6 April 2017 any tax and national insurance contributions (NICs) advantages under salary sacrifice arrangements will be withdrawn.
Just to recap, under a salary sacrifice arrangement an employee gives up the right to some salary and receives a benefit instead.
When salary sacrifice is used for cars, the employee saves tax and employees’ NIC, and the employer saves employers’ NIC. The employee pays benefit in kind tax under the normal rules for company cars. Historically, if an employee chose a relatively low cost, low-CO2 car they could make savings. Salary sacrifice schemes have predominantly been used to provide cars for employees who would not otherwise be entitled to a company car, most of whom have been basic rate taxpayers.
The draft legislation describes these arrangements as ‘optional remuneration arrangements’ (OpRAs). The industry knew that salary sacrifice schemes were being reviewed in 2016, but before last November they had no idea that the government would include cash allowances in the rule changes. This has been confirmed in the wording of the draft bill.
If your company operates a salary sacrifice arrangement or offers benefits such as company cars or the option to take a cash allowance in lieu of those benefits, you need to understand the new rules. Even employers that have never offered salary sacrifice but offer employees the choice between a cash allowance and a company car are caught by the new rules. An awful lot of companies, tens of thousands and maybe more, now have to consider how these changes affect them.
The draft legislation describes two types of OpRA, both of which will now be regarded as conferring a benefit on the employee.
And here is the key piece of information: if an employee choses to take a benefit instead of an amount of salary, they will be taxed on the greater of the salary given up and the taxable value of the benefit in kind.
The legislation includes provisions designed to stop people claiming that a particular type of benefit or form of salary reduction falls outside the scope of the rules.
There are transitional arrangements. If someone took a car emitting more than 75g CO2/km on a salary sacrifice scheme before 6 April 2017 they will be taxed under the old rules (the normal company car BIK rules) until the earlier of 6 April 2021 or the date when they modify or renew the deal. If the car emits less than 75g CO2/km the old rules continue to apply.
If an employee changes or renews the OpRA on after 6 April 2017 the new rules will apply from the date of the renewal or change. Amendments that arise because of matters that are not within the control of the employer or employee – e.g. the car is written off and replaced, or the employee is allowed to vary the arrangement because they take are on extended sick or leave or maternity leave – are not regarded as changes for this purpose.
Is a car emits more than 75 grams CO2/km and the employee has sacrificed salary, they will be taxed either on the normal basis for a company car (which is broadly; list price multiplied by a percentage based on the CO2 emissions of the car) or on the amount of salary they sacrificed, whichever value is the higher. To determine whether the benefit in kind or the salary sacrifice delivers the higher value, any capital contribution made by the employee towards the purchase of the car or payments for private use are ignored in the initial calculation (called the “modified cash equivalent”).
Once the appropriate amount has been calculated the employee gets credit for any capital contribution (capital contribution [max £5,000] x the appropriate percentage). Credit is then given for any private use contribution.
Fortunately, HMRC has provided an example of how this will work in practice. Assume an employee has a car for the whole of 2017-18, for which they sacrificed £300 salary per month, and they also paid £1,500 to get a higher spec car than their limit allowed. The car’s list price is £20,000 and it has an appropriate percentage of 17%. The normal cash equivalent value of the vehicle would be:
The modified cash equivalent is:
The sacrificed salary exceeds the modified cash equivalent, so the sacrificed salary will be used to calculate the additional amount to be treated as earnings and taxed.
Therefore the taxable amount is £3,600 less £255 (capital contribution of £1,500x 17%) = £3,345.
This approach also extends to free fuel supplied to an employee who gives up salary for the right to receive free private fuel paid for by their employer. They will be taxed on either the cash equivalent value of the fuel (calculated on the normal basis where the fuel multiplier of £22,600 is multiplied by the appropriate percentage based on the car’s CO2) or the amount of salary sacrificed by the employee for the benefit of the fuel, whichever is the greater.
So if an employee sacrifices £400 per month and their employer pays for private fuel for a company car with an appropriate percentage of 20%, the cash equivalent of the fuel benefit will be £4,520, the sacrificed salary will be £4,800, and as the sacrificed salary exceeds the cash equivalent value of the fuel, the employee will be taxed on £4,800 not £4,520.
A similar calculation needs to be made if salary is sacrificed in return for being given a company van or free private fuel for such a van.
It’s going to take some while for fleet managers and the fleet industry to get their minds around this sort of logic and there are a lot of consequences of these new regulations.
Professor Colin Tourick
Article published in Fleet World
This is the third time in the last twelve months that we have looked at salary sacrifice in this column, and I make no apologies for returning to it now. There are so many myths about the impact of the Chancellor’s announcement in November that it’s definitely worthwhile taking a deeper look.
Just to recap, in a nutshell, the changes the Chancellor announced were as follows:
If an employee takes a car emitting more than 75g/km of CO2 they will pay the higher of (1) the relevant level of Benefit In Kind (BIK) tax for that car or (2) tax on the amount of salary sacrificed. The changes commence on 6 April 2017 for new agreements and 6 April 2021 for agreements that were live on 6 April 2017. Cars with 75g/km or less (ULEVS – Ultra Low Emission Vehicles) are not affected by the changes.
So, let’s knock on the head some of the myths that have been flying about.
That’s not correct. The tax treatment has changed for some cars but employers can still offer salary sacrifice for cars.
Imagine a situation where you are about to start a new job and the HR person goes through a nice long list of all of the benefits of employment. “We also offer a simple scheme whereby you or a member of your family can drive a brand new fully-insured car using the discounts we have negotiated with our suppliers and the interest rate we pay when borrowing money. In other words, you get the benefit of our buying power.”
Wouldn’t that sound attractive to you? Well that’s still the position. Yes, some tax benefits will only be available for cars emitting more than 75g/km of CO2 from 6 April, but this doesn’t stop the employee getting the benefit of their employer’s buying power, whilst still enjoying other savings like employee National Insurance.
That’s not correct either. Cars that are ordered under salary sacrifice arrangements before 6 April this year will benefit from the old tax rules even if they are delivered afterwards. The 2021 date refers to how long the existing tax treatment of current contracts, and new contracts signed before 6 April, will be protected for.
Also, incorrect, and not just because the rules remain unchanged for ULEVs.
Salary sacrifice cars were always regarded as regular company cars for tax purposes. BIK tax rises annually and will continue to do so for all company car drivers. If the BIK tax an employee is paying on their car already exceeds the income tax on the salary being sacrificed, they will be unaffected by the new rules.
This point, which is explained in more detail in the Range Rover Evoque example below, has not received enough publicity. One leasing company carried out an evaluation of the effect of the new rules on their salary sacrifice clients. They started by assuming that every salary sacrifice employee currently driving one of their cars would have stared their contracts after 5 April. According to their evaluation, 46% of those drivers would be paying no more tax under the new rules than they are paying now in BIK tax. If they did have to pay extra tax, in most cases this would be less than £5 per month. Of course, the employees could avoid this extra cost by simply choosing lower-CO2 or cheaper cars.
We’ve already dealt with the tax benefits. Employers will no longer make Class 1A NI contribution savings on vehicles with emissions above 75g/km of CO2. But there has been little publicity about the fact that the Chancellor’s announcement does not affect employee national insurance at all, so there are still NI savings to be made. 75% of current salary sacrifice drivers in the UK are basic rate tax payers so this represents a 12% saving on top of the other discounts.
In fact the opposite appears to be the case. The day after the Chancellor’s autumn statement a couple of large companies announced that they were withdrawing their salary sacrifice schemes. However, leasing companies have said publicly that they have launched many new schemes since November. It seems that a backlog had built up whilst employers waited to hear what was said in the Autumn Statement. And many employers have realised that their employees value these schemes even without the tax benefits.
As already shown above, this is not correct. However, the savings will be good for ULEVs under the new rules.
Let’s now look at a couple of interesting examples. In the first example, we can see that there is still a saving to be made by the employer even though the CO2 of this vehicle significantly exceeds 75g/km.
|The employer’s position|
|Current||Post April 2017|
|Vehicle & CO2||92 g/km||92 g/km|
|Vehicle scale charge||20% (ave)||20% (ave)|
|Gross salary reduction||£366.53||£366.53|
|Benefit in Kind||£301.00||£301.00|
|Class 1 NI that would be paid on salary||£50.58||£50.58|
|Class 1A NI payable on gross reduction or taxable benefit, whichever is higher||£41.54||£50.58|
|Net saving per employee||£9.04||£0.00|
|Average annual net saving||£108.48||£0.00|
|Average pension saving per employee (if employer reduces gross pay for pension purposes)||£51.31||£51.31|
|Monthly net saving||£60.35||£51.31|
|Annual net saving||£724.20||£615.72|
ULEV vehicle example Current
And in this high-CO2 and high P11D value example the driver will see no increase, as they are already paying more in gross BIK than the gross salary being sacrificed.
| Range Rover Evoque – 40% tax payer
|The employee’s position|
|Current||After 6th April 2017|
|Value of the car (P11d)||£36,562.00||£36,562.00|
|CO2 emissions & Average HMRC BIK Rate||113g | 22%||113g | 22%|
|Gross salary sacrifice per month||£ 567.14||£567.14|
|Monthly BIK (P11d value x CO2% x marginal tax rate, divided by 12)||£ 268.12||£268.12|
|Income Tax saving (gross sacrifice x tax rate)||£ 226.86||£226.86|
|NI saving per month (this saving will remain)||£ 11.34||£11.34|
|Tax due (BIK or income tax whichever is higher)||£ 268.12||£268.12|
|Net cost to employee||£ 597.06||£597.06|
|(Gross cost – NI saving – Income Tax saving + Tax due)|
I suspect that once they do the sums, most employers will decide to stick with their salary sacrifice schemes. The calculations now have to be done slightly differently but the financial logic in favour of salary sacrifice for cars remains intact.
Professor Colin Tourick