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Leasing company electric cars: How do salary sacrifice and tax reliefs work?

The use of electric cars is becoming more widespread, as they develop into a more affordable and accessible mode of transport.

Introducing electric cars into a company car fleet is something that employers should be actively looking to do as a way to reduce their fuel costs and carbon footprint.

If your company is planning to lease an electric car for an employee, you might be wondering what the tax and national insurance contributions (NIC) impact of this would be via a salary sacrifice arrangement.

By providing a lease car through a salary sacrifice arrangement, you are effectively creating a contract between the employer and employee for a company lease car.

Where company car is chosen instead of some form of salary, “the taxable value of the benefit is the greater of the amount of cash pay given up and the taxable value under the normal Benefit in Kind rules”, according to HM Revenue & Customs (HMRC).

Under optional remuneration rules (OpRA) this arrangement would, therefore, oblige the employer to consider the salary foregone vs the cash equivalent of the benefit being reported.

This applies when computing the Benefit in Kind being reported on form P11(d).

However, the usual rules of OpRA do not apply when providing an electric car, as OpRA rules are disapplied when a car is a low emissions vehicle.

This type of vehicle is defined as having Co2 emissions of 75g/km or less.

Because these rules are disapplied, an employer is only obliged to work out the cash equivalent of the company car benefit.

Working out the Benefit in Kind rate is achieved by taking the list price and multiplying it by the appropriate percentage for the car’s CO2 emissions (currently two per cent for tax year 2022/23 for fully electric vehicles).

This translates to the reduction in employer class 1 NICs due via payroll on account of the salary sacrifice.

For the employee, they will save on employee class 1 NIC along with tax via the salary sacrifice.

For help and advice on related matters, contact our team today.

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