Contract Hire and Leasing Specialists0845 296 4423
In 2002 the government introduced the CO2 emissions based taxation of company cars as it began to proactively use taxation as a means of encouraging company car drivers to choose environmentally friendly. As a result the average CO2 emissions of new cars in the UK has dramatically fallen and so, buoyed by this clear validation of its policy, the government extended the scope of emissions based taxation with the introduction, last year, of legislation governing the corporation tax relief available on company cars.
Meanwhile, given the impact of the recession the government has been forced to increase taxation. With effect from April 2010 the highest rate of income tax rose to 50% and in April 2011 the rate of National Insurance Contributions (“NIC”) will rise by 1%. However, as the benefit-in-kind on a petrol company car with emissions of less than 120g/km is only 10% of its list price there is a significant difference between the taxation of cash compared to the taxation of company cars.
When taken together with the corporate discounts enjoyed by fleet operators the company car represents a tremendously valuable benefit. Employers can significantly enhance the value of their employee reward package, by offering staff a range or environmentally friendly company cars, without increasing payroll costs. Many employers are therefore considering the inclusion of company cars within their existing flexible benefits schemes, with the cost of the car being met via salary sacrifice.
The employer offers employees the option of a company car.
Interested employees select a vehicle; decide how many miles they will complete per annum, and how long they would like to keep the car.
The employer acquires the car via a contract hire agreement.
The employee agrees to a salary sacrifice to fund the contract hire cost, which will include maintenance, breakdown cover and road fund licence.
This tax-efficient arrangement offers benefits to employers and employees.
Employers
Employers may choose to benefit from the associated reduction in NI costs but schemes are usually designed to be cost neutral, albeit with a buffer built in to cater for early leavers or other unforeseeable events.
Although employers may not generate a direct financial saving, they benefit by being able to offer a fantastically attractive proposition to employees that adds real value to their remuneration package at no extra cost. Hence:
As employees seek out employers that offer a reward package that fits with their lifestyle, a well run car scheme can promote the company to ‘employer of choice’ status and enhancing employee recruitment, motivation and retention.
Salary Sacrifice for cars can help employers to maximise the ‘total reward value’ of their benefit package and thereby increase employee motivation and enhance staff retention rates.
As salary sacrifice works best for low emissions cars salary sacrifice should also enhance the employer’s ‘green’ credentials.
As participation grows, salary sacrifice should mitigate health and safety concerns as employees will no longer use private vehicles on company business but will instead drive newer, well maintained company cars.
Employees
The salary sacrifice allows the employee to surrender part of their salary in return for the employer’s agreement to provide a non-cash benefit. The employee is therefore able to pay for most motoring costs-effectively everything except fuel –from gross income, not net.
Because the cost of the car is deducted fron the employee’s gross salary, before statutory deductions, he or she is able to save income tax and National Insurance Contributions. For example, a basic rate tax payer could give up salary taxed at 31% (income tax and National Insurance Contributions) and instead choose a petrol car with emissions below 120g/km and pay income tax on only 10% of the list price.
Employees may also benefit from corporate purchasing power and so their costs may be further cut insofar as the vehicle is supplied at trade not retail prices – a differential of 35% to 40% in some cases.
An employee1 earning £30,000 per year wishes to sacrifice salary in exchange for a VW Golf 1.6 Tdi 105 Bluemotion.
The cost for the employee, including maintenance and road fund licence, is £321.61 per month. The car’s list price is £19,060 and its CO2 emissions are 99g/km, giving a benefit-in-kind scale charge of 13%. The following pre and post sacrifice payslips outlines the savings available to the employee.
The employee’s payslip before entering the scheme is set out below:
| Name | Office | NI Number | Tax Code | Period | Date |
| A Smith | London | AB123456C | 647L | 2 | 06/05/2010 |
| Pay and allowances | Deductions | Period | Tax year | ||
| Salary | £2,500.00 | Tax | £392.00 | £784.00 | |
NI-employee |
£222.64 | £445.28 | |||
| Total pay and allowances | £2,500.00 | Total deductions |
£614.64 | £1,229.28 | |
| Taxable pay | £2,500.00 | Net pay | £1,885.36 | £3,770.72 | |
Once participating in the scheme the payslip would be as follows:
| Name | Office | NI Number | Tax Code | Period | Date |
| A Smith | London | AB123456C | 399L | 2 | 06/05/2010 |
| Pay and allowances | Deductions | Period | Tax year | ||
| Reference Salary | £2,500.00 | Tax | £396.06 | £761.06 | |
Sacrifice |
(£321.61) | NI-employee |
£187.26 | £409.90 | |
Revised salary |
£2,178.39 | ||||
| Total pay and allowances | £2,178.39 | Total deductions |
£556.32 | £1,170.96 | |
| Taxable pay | £2,178.39 | Net pay | £1,622.07 | £3,507.43 | |
The employee’s take-home pay has been reduced by £263.29 but in return they have the use of a car that costs £321.61 per month to lease, a saving of £58.32 per month.
As many employers can negotiate significant purchasing discounts that are not available to individuals, the cost of a comparative Personal Contract Purchase or Personal Contract Hire agreement is likely to be greater than £321.61 per month. For example to lease this car via a Personal Contract Hire agreement would cost £428.152 per month, so in reality the employee saves £164.86 per month.
1Assumes contracted in to the State Second Pension and income tax and NIC rates and allowances for 2010/11 apply. Income tax and NIC due for subsequent years wil l change in line with legislative changes.
2Comparable market quotation obtained in (April 2010).
For a no obligation quote please contact our sales team on:
0845 296 4423
At Days Contract Hire it is our aim to provide best value to our customers through a flexible, friendly and efficient contract hire service, communicating in an open and mutually beneficial manner to build a spirit of partnership.
We offer all manner of contract hire options and financial options to ensure that you find our service as affordable as possible. If you arrange a leasing agreement with Days Contract Hire you will be assigned a dedicated Account Executive who will deal directly with you every time you contact us. This will ensure that you build a rapport with us as we help your business to thrive.
