Prior to the 6th April 2017 employees who opted to sacrifice their salary for a car would receive further benefits by decreasing their Income Tax and NI contributions through reduced gross pay. This benefit was also passed through to the employer through a reduction in the employers NI contributions.
Since the 6th April 2017, new legislation (see HMRC’s Employment Income Manual): OpRA - Optional Remuneration Arrangements has come in to play, placing salary sacrifice schemes on an equal footing with other perk schemes provided to employees. This briefing note aims to illustrate how these changes will affect key individuals in the fleet industry, understand the underlying reason for these changes and finally provide some clarity for what the future holds.
As of the 6th April 2017, employees entering a ‘salary sacrifice’ scheme for a car will be taxed on the larger of the BIK value of the car and the cash forgone. However,
- If the cash forgone is for a car with CO2 emissions less than 75g/km then the old rules will apply.
- Those who entered their agreement before this time will have ‘grandfather rights’ until April 2021.
- Variations post April 6th 2017 to agreement entered in to before April 6th 2017 will move the agreement under the new OpRA except if the variation is due to one of the following,
a. Accidental damage
b. Reasons beyond the control of the parties to the OpRA
c. Reasons connected with sick pay, statutory maternity/paternity/shared parental pay
d. Statutory adoption pay
Figures 1 and 2 compares the effects this will have on employees and employers alike using two WLTP certified cars, an electric BMW i3 and a 2 litre Diesel Volvo V40. The comparisons are based on £450 cash forgone per month and CCT rates for financial year 2018/19.
Effects on the 20% Tax Payer and their Employer (see Fig. 1)
For the BMW i3, an employee opting for an OpRA, forgoing £450 cash per month, will see an additional tax bill of £1,080 per annum or £90 per month under the new OpRA rules. This sharp rise is due to the double edged sword that OpRA presents where:
- The previous tax saving is lost
- The employee is now taxed on the larger of the BIK value of the car or the cash forgone
Secondly, the employer will see an additional NI bill of £745 per annum.
For the Volvo, despite having a lower P11D value the BIK value is larger than the cash forgone and therefore the employee will now pay tax on the BIK value of the Volvo. This will land the employee with an additional tax bill of £1,507 per annum or £126 per month. Furthermore, the employer will see an additional NI bill of £1,040 per annum.
Effects on the 40% Tax Payer and their Employer (see Fig. 2)
For the 40% tax payer the effects are double, anyone opting for a BMW i3 through an OpRA will pay an additional £2,160 per annum or £180 per month in tax. Again, the employer will see an additional NI bill of £745 per annum.
Those employees opting for the Volvo via an OpRA will see an additional tax bill of £3,015 per annum or £252 per month, with the employer seeing the same additional National Insurance contributions of £1,040 per annum.
As stark as these changes may seem there is some method to HMRC’s madness. The introduction of OpRA moves companies that offer ‘salary sacrifice’ schemes onto the same playing field as companies with a ‘cash or car’ scheme. Thus, all employers and employees are now subject to the same taxation mechanism and legislation regardless of the label placed on the car scheme. This is illustrated in the following graph – ‘OpRA’ V ‘Cash or Car’.
On the left of the graph there is a ‘Salary Sacrifice’ scheme or OpRA,
- The pink bar shows an annual salary of £25,400 awarded to an employee, there is no money forgone and the employee does not receive a company car.
- The grey bar shows an annual salary of £20,000 awarded to an employee, the employee has forgone £5,400 for a company car benefit.
On the right of the graph is a ‘Cash or Car’ scheme,
- The pink bar shows an annual salary of £25,400 awarded to an employee, comprised of a base salary of £20,000 plus a cash allowance £5,400 for a car, the employee does not receive a company car.
- The grey bar shows an annual salary of £20,000 awarded to an employee, the employee has forgone the cash allowance of £5,400 and opted for a company car benefit instead.
The dotted line shows that on both schemes, when opting for the company car benefit and forgoing £5,400 of salary or cash allowance the annual salary awarded to the employee is equal. Similarly, the dashed line shows that on both schemes, when the employee opts for the cash allowance or no OpRA, the annual salary is equivalent.
The remaining difference between these two schemes is perception. On the left is a generous salary that offers no perks and on the right is an ample salary with a choice of perks!
For those being recruited, this difference may provide the swing required in a final decision, for existing employees these changes will provide a new challenge when it comes to vehicle renewal. Any employee entering a car scheme must now be cunning like a fox, to ensure they get the best value for money.
Moving forward, there will be an increase in cost to both employee and employer and all new schemes will need to be well designed to minimise the cost that is passed on to both parties. Echoing the closing sentiments of the Cash or Car Conundrum a poorly designed car scheme will leave not only the company out of pocket but also opens the door to employees reconsidering their options.
Thank you for reading, if you need help with your OpRA or Cash or Car schemes, please contact us today on 01278 550270!