The company car market is undergoing a transformative shift, driven by the increasing popularity of salary sacrifice schemes and the adoption of electric vehicles. This evolution is reshaping the landscape of company car benefits and taxation, offering both environmental and financial advantages.
Rising Popularity of Salary Sacrifice Schemes
Salary sacrifice schemes for cars have seen a remarkable surge, with a 47% year-on-year increase in the number of vehicles delivered through these programs. This growth has contributed to a rise in employees paying benefit-in-kind (BIK) tax on vehicles, with an additional 40,000 employees participating year-on-year. This marks a 5.5% increase, the first since 2015, highlighting the growing appeal of these schemes.
How Salary Sacrifice For Company Cars Works
An employee leases a car through their employer, resulting in a reduction of their pre-tax salary. This reduction lowers the income tax and National Insurance Contributions (NIC) the employee needs to pay. Instead, the employee is taxed based on the value of the benefit, known as Benefit-in-Kind (BIK) tax and the employee pays a BIK tax based on the car's value - avalue determined by the higher of two values: the sacrificed salary or the BIK calculation.
The BIK calculation considers the car's CO2 emissions and list price, with lower emissions resulting in a lower taxable value. By participating in a salary sacrifice scheme, an employee's taxable income is reduced, which can lower their progression into higher tax brackets. This can be particularly beneficial if the sacrificed income would have been taxed at a higher rate.
Employees can get more value for their money due to employer-negotiated deals and tax benefits, especially for EVs and the employer handles lease payments and taxes, sometimes including vehicle maintenance and home charging points for EVs. A downside is the car is linked to work, so if the employee ends their job then the car is also returned.
Company Car Taxation Trends
In the 2022/23 tax year, the number of employees paying company car tax rose to 760,000, up from 720,000 the previous year. Despite this increase, the total taxable value of company car benefits decreased to £3.6 billion from £3.95 billion in 2021/22. The total income tax and National Insurance Contributions (NIC) liabilities amounted to £1.21 billion and £520 million, respectively.
Shift Towards Electric Vehicles
The transition to electric vehicles is gaining momentum, with nearly a quarter of a million company cars being fully electric in 2022/23. The number of fully electric company cars has grown from 50,000 in 2020/21 to 222,000 in 2022/23, now comprising 29% of the company car fleet. This shift is significantly reducing the average CO2 emissions of company cars, aligning with environmental goals.
Decline in Diesel Cars
The dominance of diesel cars in the company car market has waned, with their share dropping from around 80% up to 2017 to just 23% in 2022/23. This decline reflects a broader trend towards more sustainable vehicle options.
Government Incentives for Electric Vehicles
HMRC incentives are playing a crucial role in promoting electric vehicles as company cars. Employees benefit from a reduced tax charge, paying only 3% of an electric car's value compared to up to 37% for conventional vehicles. These incentives are pivotal in driving the adoption of electric vehicles.
Car Fuel Benefit Trends
The number of individuals receiving car fuel benefits has remained steady at 50,000, while the total taxable value of these benefits has decreased to £200 million in 2022/23. This reflects a broader trend towards more efficient and environmentally friendly vehicle options.