Electric cars cannot be bought for cash, as the old joke goes, they must be charged! But there are currently many worse things for a business to charge.
There has in fact never been a better time to buy an electric car because, as well as helping your organisation meet climate change targets by reducing CO2 emissions and improving air quality, it can make sense in purely financial terms.
A host of incentives are now available, ranging from tax breaks and Congestion Charge exemptions to government grants. But perhaps the most significant development has been a change to the benefit in kind (or ‘P11D liability’) rules this April that has made it much more attractive to lease all-electric cars via a salary exchange scheme.
Salary exchange (otherwise commonly known as ‘salary sacrifice’) involves employees giving up part of their salary in return for a non-cash benefit from their employer. Because their pay is lower, with certain stipulated benefits employees can pay less tax and National Insurance (NI). The employer can also pay less employer’s NI.
Ultra-low emission vehicles (defined as cars or vans emitting 75g/km CO2 or less) had in fact benefited from a degree of favourable treatment from salary exchange regulations since April 2017, as they were amongst a small number of benefits – along with pension contributions, Childcare Vouchers and Cycle to Work schemes – that were exempted from new measures removing preferential tax treatment.
But the fact that ultra-low emission vehicles were considered to be a benefit in kind in the hands of the employee limited the attractiveness of this move. The Chancellor was effectively giving with one hand but taking away with another.
Thanks to the rule changes this April, however, the benefit in kind tax for all-electric cars has been reduced from 16% to 0% for the 2020/21 tax year, and this can create savings of hundreds of pounds a month for an employee leasing a car via a salary exchange scheme.
In comparison, combustion vehicles are subject to an average benefit in kind rate of 27% when using salary exchange, making them a far less financially attractive proposition. ¹
Not surprisingly, we are receiving numerous enquiries from clients wishing to discuss taking advantage of the new incentive – which early feedback from the car leasing industry suggests is proving a real game changer.
The sale of new petrol, diesel and hybrid cars is not actually due to be banned until 2035 but the introduction of the April sweetener has seen any firms bring forward plans to switch to electric cars.
Octopus Electric Vehicles reports that during the last six months the number of drivers leasing an electric vehicle has increased by 91%, and that it has seen a 500% increase in the number of businesses ordering electric vehicles through its own salary exchange scheme. These drivers are, on average, saving 30% to 40% on monthly leasing costs. ²
It should be noted that benefit in kind liabilities on all-electric vehicles are due to increase to 1% in April 2021 and to 2% in April 2022, and to remain at 2% for 2023/4 and 2024/5. ³ But these still remain far more attractive than the rates for petrol and diesel vehicles.
Furthermore, electric cars involve huge savings on running costs over petrol-using cars, and salary exchange schemes can offer a range of benefits over and above any tax savings realised.
For example, companies are commonly able to use their economies of scale to acquire cars at keener prices than those available to individual consumers, and most of the benefits that tend to come with a company car – like road tax, servicing and maintenance, insurance and breakdown cover – are included in a salary exchange car scheme. Employees are therefore spared from considerable effort and hassle.
From an employer’s perspective, a salary exchange car scheme can also help alleviate hierarchical issues by offering wider car ownership within the company, as opposed to having seniority as the qualifying factor for having a company car.
Content correct at the time of writing and is intended for general information only and should not be construed as advice.