Electric Vehicles (EVs) – are they affordable?

The number of company cars has remained relatively stable for a number of years but with the increasing popularity of EVs, many businesses are now considering whether EVs are appropriate as a means of helping with:

• The increased focus on the ESG (Environmental, Social & Governance) agenda, particularly with regards to the carbon footprint the business produces

• Managing employment costs, as implementation of an EV salary sacrifice arrangement can generate savings for both employer and employee, and

• The need to recruit and retain talent, with many employees now looking at wider issues such as sustainability, but also interested in maximising take home pay.

With well in excess of 200 electric models in the market, ranges between charging of 200-300 miles and increasing numbers of charging points, the old reasons for steering well clear of EVs are less persuasive.

The Government has recently announced that it is pledging to invest £620 million into grants for electric vehicles and street charging points.

So what are the potential benefits of offering Electric Vehicles under a salary sacrifice arrangement.

The mechanics of an EV salary sacrifice arrangement

Put simply, an employer acquires a vehicle, typically under a lease arrangement. The employee gives up salary equivalent to the lease cost, so the employee has offset the cost the employer has incurred. However, the salary is given up before PAYE and NIC, so the net salary given up is 67% of the actual lease cost for a basic rate taxpayer (58% and 53% for higher and additional rate taxpayers).  And because the tax on an EV as a benefit in kind is so low (1% of list price for 2021/22 and 2% from April 2022 – March 2025) the savings for the employee can be substantial, increasing from 2022/23 when the NIC rate increases.

In cash terms, the employee can be having use of an EV at a 45%+ discount! And by the time you have included employer NIC and VAT savings, the employer also benefits significantly. So even if an organisation is not focussed on ESG issues, the financial savings alone merit EVs being considered.

Points to note:

It is always important to ensure that salary sacrifice arrangements are implemented carefully. However, it is worth noting that when HMRC introduced legislation (Optional Remuneration Arrangements) to remove some of the tax advantages of using salary sacrifice, the use of EVs was specifically excluded from the measures. In other words, HMRC indicated that they did not consider these arrangements to be controversial.

It is also worth remembering that these arrangements do help the Government in moving towards its targets for CO² reductions and replacing diesel and petrol cars.

Whether employers are looking at a single car for an executive, or a wider offering enabling employees to select EVs as their main or even a second car, there are a variety of issues to consider to ensure that the salary sacrifice is effective, the appropriate tax treatment is applied and the correct reporting takes place.

With the increased focus on the ESG agenda the provision of EVs is anticipated to become more commonplace as employers and employees alike consider more widely their impact in this area.

Caroline Jones
caroline.jones@bdo.co.uk

Mark Seaden
mark.seaden@bdo.co.uk

Shawn Healy
shawn.healy@bdo.co.uk