Employees with the Option of a Car Allowance Could be hit by New HMRC Proposals

Proposals being considered by HMRC could have a significant impact for companies (and their employees) that offer a choice of a company car or a car allowance. The effects would be particularly severe where users have opted for low emission vehicles.

The review is part of the HMRC appraisal of salary sacrifice schemes in general. Currently, the BIK value determines the tax paid by an employee with a company vehicle. This is no different if employees have the option of taking a car allowance instead of a company provided car. These rates are highly favourable for hybrid and low emission vehicles.

The proposal being considered is that if an employee has the choice of  a cash allowance or a vehicle, the tax liability will be determined by the taxable value of the cash allowance they were offered if it is greater than the taxable value of the benefit.

Fleet News produced the following illustration:

A driver who was offered a cash sum of £5,400 (£450 per month), but decided to opt instead for a Volkswagen Golf, with emissions of 109g/km, would pay an additional £86 if a 20% taxpayer, or £173 if in the 40% bracket (see panel).  The employer would also pay Class 1A National Insurance (NI) on the higher amount, an additional £59 in tax.

If they opted for a plug-in hybrid Golf, with emissions of 39g/km, the employee’s tax bill would rise by £579 for a 20% taxpayer or £1,159 if they are in the 40% bracket. The employer would also have to pay an additional £400.

While these are only proposals it would be wise for companies to assess their liabilities should the new measures come into effect.

If you have any questions about financing company vehicles, payroll or tax the team at Langricks will be happy to help.