Duty of care and salary sacrifice linked to rise in company cars
The number of employees paying Benefit-in-Kind (BIK) tax on the provision of a company car has increased for the first time in ten years.
Recently released provisional data from HM Revenue and Customs (HMRC) shows that 950,000 employees paid BIK tax on a company car in 2014/15 – a 1% rise on the 940,000 recorded in the previous financial year.
This is the first time the number of people paying BIK on company cars has increased in the last decade.
How much is this worth to the Treasury?
Although the number of employees is the same as 2011/12, the amount paid to the Treasury through a combination of BIK tax and National Insurance Contributions (NIC) is now worth £1.9 billion.
Back in 2011/12, the tax take was £240m less at £1.66bn. That means a company car was worth, on average, £2,000 to the Treasury in 2014/15, compared with £1,747 three years before.
Figures also show that company car drivers paid the lion’s share of the increase, paying some £150m more compared to the £90m extra paid by employers through NIC.
Why has the tax take increased?
The higher tax take can be explained by an increase in tax rates and in the value of the latest generation of company cars.
In 2014/15, the ‘value’ of the company car parc was reported as £3.95bn, which was £290m (7.9%) more than the £3.66bn recorded in 2011/12.
At the same time, the rate at which employees paid BIK tax on their vehicles, based on their CO2 emissions, also rose, by an average 3% during the period.
This meant that a vehicle with CO2 emissions of 130-134 g/km, for example, was taxed at 16% in 2011/12, while in 2014/15 the same car was taxed at 19%, due to the tax rises.
Why have the numbers paying tax increased?
One reason offered up for the small increase was an improvement in the economy, with employers taking on more staff as the economy recovered from the woes of the credit crunch back in 2008.
Another possible cause was that companies had become more aware of duty of care issues, and realised that in order to improve health and safety compliance, they were better off offering company cars rather than cash allowances.
Growth of salary sacrifice
Some experts suggest that the increase in number of employees paying BIK tax on company cars has come about because of the growing number of salary sacrifice car schemes that have grown up in the last three years or so.
Increasing numbers of organisations now offer their employees the benefit of a brand new car in return for surrendering a set amount from their salary every month.
One of the biggest factors behind this success has been the wide availability of low-emitting, brand new cars which have been acquired in return for surrendering a set amount of salary each month, upon which no Income Tax or National Insurance is paid*. Instead, BIK tax is paid on the value of the car benefit at the employee’s marginal tax rate.
For all employees, a salary sacrifice car scheme brings the additional benefit of an all-embracing package typically including all servicing, fully comprehensive insurance, a no-quibble tyre policy, all automotive glass, annual road fund licence and breakdown and recovery assistance.
If you would like to discuss these issues in more detail, please get in touch.
*Note that the taxation of salary sacrifice schemes is currently the subject of an HMRC consultation and review.