Cash allowance tax revisions – are you aware of the changes?

I was fortunate enough to attend a BMW Group fleet drive event this week.

The cars in question were the new BMW 5 Series – a quite exquisite executive car I have to say – and the new MINI Countryman (highly competent at what it does, but not the same wow factor as the BMW).

During lunch one of the new BMW 5 Series PHEV models was behind us, yet the lunchtime chat wasn’t about the car, but about taxation changes.

Taxation changes that you might possibly have missed.

That was certainly the view of some of the fleet experts sitting around the table. They had firsthand experience of fleet managers and HR heads who just didn’t realise, or had not grasped, the implications of the tax change to salary sacrifice and cash allowance cars that commences in April 2017.

Essentially salary sacrifice cars will be taxed on the benefit in kind OR the cash sacrificed, whichever is the greater.

The same goes for cash allowance drivers – they will have to pay benefit in kind on either the taxable benefit of the car OR the cash allowance, depending on which is greater.

Not only is this complex to understand, but it has the effect of potentially increasing an employee’s taxed income and increasing the NICs payable on the benefit by an employer.

It also creates some administrative headaches too. Not only must the P11D value of the car be logged but also the amount of the cash alternative or cash sacrificed which stays with the employee for the duration of the benefit.

Complicated? Gets worse…

The amount of tax payable can swap between the cash or the benefit in kind. So in this example, a Nissan Qashqai (£24,155) in year one is taxed on the cash benefit (£450 a month) before moving to the car benefit in years two and three.  The effect is a £131 increase in benefit in kind taxation.

 

This example in the table is based on a 40% tax payer:

 

2017/2018 2018/2019 2019/2020
BIK Rate 21% 23% 26%
Annual cash allowance £5,400 £5,400 £5,400
BIK on Car £5,073 £5,556 £6,280
Tax on BIK £2,029 £2,222 £2,512
Tax on cash allowance £2,160 £2,160 £2,160

Example bassed on a Nissan Qashqai (CO2 of 99g/km and list price of £24,155)

 

So what’s the answer?

I asked Angela Robertson for some advice – Angela being Fleet Alliance’s finance director she should know about these things.

“First off, any arrangements in place before 6 April 2017 will continue unaffected by the tax changes until April 2021,” she told me. “So if you have a car on a cash allowance or on salary sacrifice there is no immediate worry. But you should consider the implications of the tax changes on your car choice in the future.

“Second, the majority of cars will not be affected as the benefit in kind will be higher than the tax you would have to pay on the cash allowance.”

So this is reassuring.

But the simple answer to avoid any increase in taxation is to choose a ULEV car (which is an Ultra Low Emission Vehicle that has emissions below 75g/km).

For example, that BMW 5 Series plug-in hybrid that was sitting behind us at lunch that I referred to earlier (46g/km of CO2).

Or the Nissan Leaf electric vehicle with zero tailpipe emissions.

If you don’t fancy that degree of electrification, then there are some cars (all Toyotas) that fall under the 75g/km barrier, such as the Toyota Prius 1.8 VVT-i Business Edition CVT with emissions of 70g/km.

All these cars are guaranteed to pay benefit in kind on the car element only (rather than the cash amount). But while the number of sub-75g/km cars is increasingly monthly, choice is still limited and may not be suitable for your circumstances, whether personal or business.

It all makes the choice of your next car rather more complex than it was before 07 April 2017.

 

If you would like some help with the issues raised in this blog, then please contact us on 0345 601 8407. Our fleet management experts can help clarify this complex area of taxation.