The main driver for a company car salary sacrifice scheme is the tax savings for the employer and employee.
The major saving arises for the employee because they no longer pay tax and national insurance (NI) on the earnings that are being sacrificed.
Instead, they pay income tax on the benefit in kind on the car. So if an employee is selective over the car they take , there are savings that can be achieved.
Savings for the employer relate to the NI on the earnings sacrificed and the Class 1A NI arising on the benefit in kind. But it should be remembered that the taxation of company cars changes every year and those doing the estimates of cost savings need to bear this in mind.
Also, it is often overlooked that the employer can enjoy a saving on mileage allowances paid, depending on their policies, because the employee is no longer using their own car for business travel.
The employee cannot enjoy the approved mileage allowance payment, currently 45p per mile up to 10,000 miles in a tax year and 25p per mile thereafter, but instead get reimbursed at the advisory fuel rate, the amount of which varies according to the car’s engine capacity.
Depending on levels of business mileage, this can deliver significant savings for the employer.
The employer can make another saving by recovering 50% of the VAT on lease and maintenance costs. HM Revenue and Customs has issued detailed guidance on this.
Alastair Kendrick is tax director at MHA MacIntyre Hudson