Salary Sacrifice: Tax to Rise for Company Cars

HMRC recently announced that it had spotted two mistakes in the relatively new rules for salary sacrifice arrangements involving cars and vans. It’s published draft legislation to correct the errors. How and when will they take effect?

Optional remuneration recap

A salary sacrifice scheme falls into what HMRC calls an optional remuneration arrangement (OpRA). Broadly, this is any arrangement where you offer an employee the choice between taking their full salary or giving up part of it in exchange for a benefit in kind. One of the most popular OpRAs is swapping salary for use of a company car or van.

Are all company car drivers caught?

The OpRA rules don’t apply to arrangements involving company cars with CO2 emissions of 75g/km or less. For other cars they apply from the earlier of 6th April 2021 and when the arrangement is renewed or varied, for example, where a different level of salary is sacrificed or there’s a change of company car. It’s likely that few arrangements will survive outside the OpRA rules until 2021 and many will already be caught by them.

How much is taxable?

Where an arrangement is caught by the OpRA rules, instead of the employee being taxed on the amount of benefit in kind calculated under the normal company car or van rules, it will be taxed on the greater of the benefit in kind under the normal rules and the salary they’ve given up in exchange. According to HMRC, the original legislation behind the calculation of the amount under the second point contained two errors.

The first error

Apparently, it was always intended that all running and other costs, e.g. insurance and servicing, connected to the car or van should be added to the salary given up and the total compared to the normal car benefit to find the greater.

Example: On 6th April 2018 John’s employer offers him a company car if he sacrifices £3,000 salary per year in exchange. The normal taxable benefit for the car is £4,000. John’s employer, Acom Ltd, pays insurance, road tax, repairs, etc. of £1,300 for 2018/19 and 2019/20. For 2018/19 Acom must report a taxable OpRA benefit of £4,000 (the car benefit), but for 2019/20 it’s £4,300 (the salary forgone plus car expenses) as the greater.

The second error

Where an employee has use of a company car through an OpRA and pays a contribution toward the cost of the car, say, to have a superior model, the normal car benefit is reduced to take account of the employee’s contribution. HMRC now says that the OpRA rules overstated the reduction for the employee’s contribution because it didn’t pro rata it where the car is only available for part of the year.

Example: Ted changes his company car half way through 2018/19. He contributes £5,000 toward the cost. Normally, to arrive at the taxable benefit the £5,000 is deducted from the car’s list price and the result multiplied by a percentage and time apportioned as the car was only available for half the year. However, the original OpRA rules calculated the taxable benefit ignoring the contribution and then made a deduction for a percentage of the whole amount. The new legislation corrects this from 6th April 2019.

From 6th April 2019 the figure of salary sacrificed to be compared to the taxable benefit is increased by the car running costs incurred by the employer. Also, if an employee contributes to the cost of a company car or van, the contribution must be time apportioned if the vehicle is only available for part of the year.

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