Managing employee car benefits
Finding an economical solution for employee car provisionTags: Automotive Consultancy Corporate ECOS Taxation
Employee car benefits: What are the options?
Company cars and other employee car benefits have long been used as a way for businesses to reward and retain staff, both as part of business need for high mileage drivers and as an extra perk. However, the cost of receiving and providing company cars to employees has steadily risen over the past few years, eroding the value of the benefit provided.
Since 2015, an annual two percentage point increase in Benefit in Kind tax rates has been applied. The tax bands were readdressed in April 2020, after the Worldwide Harmonised Light Vehicle Test Procedure (WLTP) was introduced properly. Although the April 2020 tax bands for higher emission cars are 1%-6% lower than previous levels, the rates are based on new CO2 figures produced by the WLTP. These figures are generally larger due to the more real-world nature of the test, pushing vehicles into higher emissions bands and therefore offsetting any savings made from the lowered tax brackets.
This has had a significant impact on the liabilities incurred by both drivers and employers.
The average taxable value of a company car has almost doubled since 2010, from £3,850 to an average of £6,030, so an employee can expect to pay £1,790 in company car tax per year on average.
What does this mean for an employer? The total Class 1A National Insurance Contributions (NICs) bill from HMRC increased from £470m in 2010-11 to £670m in 2017-18. That’s an average business cost of £740 per year per vehicle, a significant financial burden. HMRC states that the cost of NICs for employers is projected to be £730m in the 2018-19 tax year.
This increased financial burden may be impacting driver behavior, with a 3.3% decline in the number of company car drivers when compared to the year before.
The current Operational Remuneration Arrangements (OpRA) state that anyone who enters a salary sacrifice agreement must pay income tax on the greater of the taxable value; the vehicle or the salary being sacrificed for the car.
The introduction of OpRA legislation in 2017 reduced the savings available through salary sacrifice, significantly lessening the scheme’s appeal.
Both company car and salary sacrifice schemes may be more suitable when applied to electric vehicles, which currently enjoy 0% BIK taxation, but these vehicles are not suitable for every type of driver or geographical area.
Are company car schemes still worthwhile?
According to Fleet News, 71% of employers still believe that a company car is a valuable recruitment tool. There are still around 900,000 company car drivers in the UK (latest available figures) and The Association of Fleet Professionals (AFP) argues that despite the impact of COVID-19, the company car ‘remains a highly effective tool for businesses and, in many instances, the only viable transport option.’
Employee Car Ownership Schemes (ECOS)
Unlike other company car arrangements, in an ECOS, the employee is the owner of the car from the outset, meaning that the vehicle is not a traditional ‘company car’. This structure is recognised by HMRC and you can read more about it here.
As the vehicle is owned by the employee and they make repayments on the car, an ECO Scheme removes the company car tax liability for the employee and the cost of Class 1A National Insurance Contributions for the employer, providing significant business savings in comparison to traditional company car and salary sacrifice schemes. As the cost of company car tax continues to rise, the more cost-effective an ECO Scheme becomes for both employers and employees.
To find out how an Employee Car Ownership Scheme could benefit your organisation, contact our experts today;