Electric Car Salary Sacrifice Tax Rules
For many years HM Revenue & Customs felt that tax legislation and case law gave employees a financial advantage from having a benefit-in-kind (or 'perk') where there was also a cash alternative available instead of the perk.
'Salary Sacrifice' (as this arrangement is often known) means that complex tax case law applies so that perks could be valued by the cash alternative offered by an employer.
This quirk in the law allowed some the opportunity to manipulate the perk tax system - they deliberately arranged for a cash alternative to be offered which was less than the normal taxable value of the perk, creating an artificially low taxable benefit for the employee.
A Night At The OpRa!
No, it's not a spelling mistake, you see, in the eyes of HMRC manipulating salary sacrifice arrangements costs the Treasury money, so eventually HMRC changed the law (from 2017).
Salary Sacrifice became Optional Remuneration Arrangements, or 'OpRA' and from 2017 were caught by new laws to tax the higher value of:
- a perk, as measured under normal tax rules; or
- its cash alternative (where one was available).
As a result of the changes, offering a cash alternative to a perk gave no tax benefit. Whichever amount would give a higher taxable value, cash or perk, would be used by HMRC in deciding liabilities for the perk.
However, if the change in tax law had been implemented immediately, employers and employees could have been trapped in unfair applications of the new laws due to existing contractual obligations to provide perks.
So HMRC's 'fix' had to be phased in over four years in some cases to allow employers and employees to graduate towards the new rules.
As a result, the OpRA rules weren't fully implemented until April 2021, but from then on the existence of a cash alternative to a perk meant that, with few exceptions, the perk is taxed according to the higher of the cash alternative or the normal taxable perk value.
So what does OpRA mean in practice for employers and employees?
The Rules for OpRA
The rules for OpRA in Salary Sacrifice are far more sophisticated than can be explained in one page - you'd need to spend a lot of nights in front of the OpRA rules to get to the bottom of them, but basically they cover:
- 'Type A' arrangements, where an employee gives up the right, or the future right, to receive earnings (e.g. salary or a bonus) in return for a benefit. Type A catches benefits under salary sacrifice arrangements.
- 'Type B' arrangements, which are anything other than a 'Type A' arrangement, where employees agree to get a benefit rather than cash earnings. Type B allows the rules to be applied across a much broader base.
In simple terms though, what the OpRA rules mean is that, 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:
- the cash offered as an alternative; or
- the normal taxable value of the perk.
However, recognising that some employees were already locked into OpRA arrangements when the new rules started in 2017, HMRC allowed certain existing OpRAs to continue under the 'old' tax rules until April 2021, after which time the new OpRA rules apply anyway.
Why was this important?
Well, some employees had entered into arrangements for perks which they couldn't give up immediately, perhaps because the employer had contracted for them over a fixed duration.
An example would be a company car, where an employer would perhaps have a vehicle on lease for a fixed period of years or a specified mileage.
Cancelling the lease so an employee could revert to a cash alternative could incur costs for early termination.
What Happened From April 2021?
From April 2021, for all perks caught by the OpRA rules, the perk will be taxed on the higher value (cash or perk) and the previous transitional arrangements no longer applied.
Take the example of an employee with a perk costing the employer £10,000pa.
Under typical perk tax rules the taxable benefit will be £10,000 (the annual cost to the employer), but if a cash alternative of £11,000 is available then the perk will be taxed under OpRA on the £11,000 cash alternative instead.
Reverse the values, so the perk costs the employer £11,000pa but the employee has a cash alternative of £10,000pa, and the employee will be taxed on the £11,000pa cost as this is higher.
With OpRA, Is Salary Sacrifice Still Worthwhile?
There are perks which get special treatment under the OpRA rules.
An example is company cars with 'lower' CO2 emissions.
Where the CO2 output of the car is less than 75GP/Km an employee opting for a company car will be taxed on the 'normal' benefit rules for cars even if a cash alternative is available.
Take care though where a car is provided under Salary Sacrifice arrangements and its CO2 output exceeds the 75GPK/m limit - the car will be taxed according to the OpRA rules, so the higher of the cash foregone or the car benefit will apply.
Now, why does OpRA matter?
Well, think electric company cars, where special tax rules apply currently, giving a low taxable benefit in comparison to company cars with combustion engines (even hybrid company cars).
This means that allowing employees to trade cash pay for an lower emission company car, especially electric cars, could provide employees with access to a very attractive perk on a favourable basis for both costs and taxes.
Salary Sacrifice And Electric Company Cars
We've explained more about how Salary Sacrifice works for providing an electric company cars - click on this link to go to our page on the topic.
We've also provided a salary sacrifice calculator to work out whether a company car or cash pay would deliver a higher net value to an employee as part of a pay package.