The 2017 Finance Act made significant changes to the way that employee benefits are taxed in the UK, particularly where there are Optional Remuneration Arrangements (OpRA) in place i.e. the employee has a choice between benefits and salary.
The new rules, which came into effect on 6 April this year, had a significant impact on the employee benefit strategy for most companies. The changes affect employees who choose to take a company vehicle instead of salary (‘salary sacrifice’) or choose a company car in lieu of a cash allowance, meaning that an individual is taxed on the higher of the company car tax or the income tax payable on the salary/cash allowance.
In September 2017, HMRC clarified what is involved in the calculation for the amount of salary given up in exchange for a benefit in relation to company cars. In short, only the amount used to finance the car needs to be included.
How car salary sacrifice allowances are calculated
With a salary sacrifice arrangement, the employee is provided with a car that is available for their private use, along with insurance, maintenance and other running costs. The important distinction here is that these three additional elements are considered separate and distinct payments/benefits from the car finance itself.
In the example below, the cost of the car finance at £3,986 per year is less than the taxable amount of ‘Benefit in Kind’ (BIK) at £4,514. As a result, the BIK tax calculation is used to work out the tax payable by the employee.
Cash allowance or company car?
For employees who have the choice between a company car or cash allowance, the OpRA rules still apply. However, the calculation is slightly different, as they are not paying directly for the finance of the car. HMRC allow for a “fair and reasonable apportionment” between the company’s costs for the finance and other services including maintenance and insurance, which should be calculated by the employer for each car and driver.
For example, an employee has the option to take a cash allowance of £5,000 but chooses to have a Ford Mondeo as a company car instead. The company car finance proportion is used, which in this instance is 75% of the total cost.
As a result, the finance proportion of the cash allowance is £3,750. This is subsequently compared to the standard BIK calculation – in this case, £4,514 – and the higher of the two values is used.
In most cases, the calculation above negates the impact of the OpRA legislation unless cash allowances are particularly high in relation to the company car.
Implications for employer and employee
For instances where the whole of the salary sacrifice amount or cash allowance has been applied since 6 April, it is likely that employees will be paying too much tax and employers will be paying too much in Class 1A National Insurance contributions.
Salary sacrifice calculations need to include the component costs to ensure that the employee is taxed only on the finance element of the costs. Now that only the amount used to finance the car needs to be used when calculating the salary given up, a wider range of vehicles are more cost effective on salary sacrifice than they were prior to the clarification.
Based on the assessment of the cars available on our salary sacrifice schemes, an additional 400+ cars are now more cost effective to employees than prior to the HMRC clarification, enabling a wider choice for car salary sacrifice schemes than just sub 75g/km ULEV cars. If salary sacrifice schemes are not currently available in your organisation, employees could be missing out on a benefit that still has validity.
Company car drivers who have a cash allowance option simply need to have the car finance element apportionment calculation applied to the cash allowance to establish if this is higher than the standard BIK calculation. At Hitachi Capital Vehicle Solutions, all clients receive these types of calculations as an integral part of their account management service to ensure correct values for both PAYE and Class 1A National Insurance.
Something for everyone
Organisations can introduce a range of solutions to suit all drivers, whether they are essential users with a company car, perk-entitled drivers who choose a cash allowance, or the wider employee population who need a car for occasional business use.
However, navigating the best course of action for an employee to source a vehicle can be time-consuming and confusing for both the organisation and the employee. By introducing a bespoke company car policy, fair cash allowances, a personal lease scheme and an all-employee salary sacrifice scheme, you can remove some of the complexity but will still need to support your drivers to make an informed choice.
At Hitachi Capital Vehicle Solutions, we are experts at providing clarity in an ever-changing environment. We can help support organisations to calculate appropriate cash allowances and the likely impact of policy change on both their own and their employee’s costs. Our approach – called ‘Something for Everyone’ – provides access to this service through one online solution. Supported by a telephone helpdesk, it takes employees through the vehicle and finance options available to help them choose the right solution for their individual circumstances.
Fill in the form below if you would like our team to review your current employee benefits package and identify any areas of concern or opportunity.