25 Feb 2024

Are friends (with Benefit-in-Kind) electric?

Will Benefit-in-Kind tax changes put off EV company car schemes?
By Alok Dubey, UK Country Manager at Monta

With the cost of living crisis and inflation chipping away at consumer wallets, purchasing an electric vehicle (EV) may not be at the top of everyone’s shopping list.

The large upfront cost to purchase vehicles remains a significant deterrent for consumers. Although three-quarters of drivers plan to buy an EV at some point in the future, 80% believe that battery electric cars are currently too expensive. But as 2023 has so far seen a more than 19% increase in registered BEVs on the road compared to the same point in 2022, how then are EVs still seeing record growth?

Company cars on the rise
Rather than coughing up large sums of money for the upfront costs of EVs, many are instead deciding to take advantage of company car and tax relief schemes.

Through Benefit-in-Kind (BIK) car tax – the additional money paid by staff to allow them to use vehicles outside of work hours – employees could potentially save thousands of pounds a year by making use of a new electric car.
The tax relief on electric fleets is one of the biggest reasons why company cars are becoming so popular again. Recent HMRC data showed a 13-fold increase in electric company car uptake in 2022 as BIK tax rates were cut for zero-emission vehicles.

The difference in overall costs compared to petrol or diesel-engine vehicles can be substantial. Whereas internal combustion engine (ICE) vehicles currently pay upwards of 20% BIK tax, electric vehicles pay just 2%.
For a petrol-powered Peugeot 208 at a recommended retail price (RRP) of £20,300, employees would pay more than £4,000 a year if the BIK tax was the basic rate of 20%. A Peugeot e-208, with an RRP of £31,300, would see owners pay just £626 a year.

Why is BIK tax changing?
To encourage and grow the uptake of low-emissions vehicles, BIK tax has tended to be very low. In fact, before the introduction of 1% rates in 2021, EVs were completely exempt from paying any BIK tax. The 2% BIK rate is currently fixed until April 2025, with 1% year-on-year increases planned until at least 2028.

With the UK’s finances in dire straits, new and higher tax rates becomes the go-to strategy to try and balance the coffers. In doing so, however, it could have an adverse effect on the electric vehicle market and the appetite of consumers to switch to more sustainable modes of transport.

Although the total costs of EVs will become a little bit more expensive, the benefits and savings still far outweigh the costs. Employees that opt for a company electric vehicle through salary sacrifice schemes can save up to 63% of the total cost of ownership compared to if they purchased the same car privately.

When an employee has a choice between cash and a perk and picks the perk, the employee will be taxed on whichever value is greater under Optional Remuneration Arrangement (OpRA) legislation. However, as the legislation excludes vehicles that emit 75g/km of carbon emissions or less, most electric vehicles would be exempt from this.

So not only can employees get a new electric vehicle that can be used outside of work hours, but it could also save them hundreds of pounds every year in fuel, maintenance, insurance, and running costs.

There are other benefits to company EV schemes as well. Not only can employees reduce their own personal tax bill by paying out more in their monthly pay cheque for low-emissions vehicles, but it can also mean businesses can increase the amount of Capital Allowances they can offset against Corporation Tax.

While there’s no guarantee that the Benefit in Kind rate will continue to rise beyond 2028, in the short-term there are still significant income tax savings for both parties. Class 1A National Insurance savings are on offer for employers for at least the next three tax years, which could represent an attractive proposal.

There are additional benefits for employers looking to provide charging infrastructure for staff electric vehicles. Employers can currently claim back 100% of their first year allowances on the installation cost of electric charge points, which could help convince the 75% of UK workplaces that currently don’t have a charge point installed to do so.

Employees that use workplace EV charging facilities are also exempt from BIK tax, even if the journey they use it for is for non-business use. This also applies to personal EVs owned by employees and not just those with company cars.

For staff wanting to primarily charge their vehicle at home, employers can install a dedicated charge point at the employee’s home without paying BIK tax. However, the reimbursement of electricity used for private journeys would be taxable as it could be seen as funding part of their domestic energy bill.

BIK Tax doesn’t have to be taxing
Tax can be a minefield for the everyday accountant, never mind fleet owners and employees looking into EV company car schemes. When looking into EV company car schemes, it is important to seek professional advice from tax specialists, but there are some obvious and significant advantages for businesses seriously considering them.

The case for offering employees EVs as company cars gets stronger by the day, and not just for those wanting a shiny new car. While schemes like this can help attract and retain staff, businesses can also help contribute to a cleaner, greener environment while employees save on large upfront costs and enjoy the benefits of switching to electric.