Stay informed with free updates
Simply sign up to the UK tax myFT Digest — delivered directly to your inbox.
It’s my fault. Last year, the Financial Times introduced a new salary sacrifice scheme, enabling employees to lease and drive an electric vehicle on the cheap. The scheme promises savings of “up to 40 per cent”. I love a bargain and, although I don’t need or really want an EV right now, I was intrigued by the offer.
Having registered, I plugged lots of different fake salary levels into the system, changed my age and altered my address to get a sense of the underlying dynamics of the scheme, which also included car insurance. Of course, that activity made me look extremely interested and I have subsequently been plagued by the EV provider trying to get me to sign on the dotted line.
Having done the maths, the deal was indeed pretty good, although the examples I looked at were barely worthwhile if you were a normal basic rate or a higher rate taxpayer. The offer saved a lot of money if your salary was in the £100,000 to £125,140 pay bracket, where people in the UK lose their personal tax allowance and pay a combined income tax and employee national insurance rate (the UK’s social security tax) of 62 per cent. For someone needing to get their salary below £100,000 to be able to receive more value in free childcare, salary sacrifice schemes such as this are a no brainer.
The FT would save 15 per cent in lower employer national insurance contributions and there are also some value added tax benefits. Employees would be charged a 3 per cent benefit in kind tax on the implied value of the benefit they were receiving in lieu of pay.
I emailed one much-to-be-pitied representative of the provider, asking why they could not offer lower prices when there were enormous possibilities for tax avoidance. Not surprisingly I didn’t get much joy and was told, correctly, that I would still be better off if I signed up rather than leased an EV from my after tax salary.
What is going on? Employers save some money in payroll taxes, employees get something of a bargain depending on their circumstances, providers have a potentially profitable business and this complicated web supplying EVs is hugely subsidised by other taxpayers.
This is an extremely poor example of public policy. Governments have an absolutely legitimate desire to speed the rollout of EVs, but they should just offer simple discounts, not opaque and massive subsidies to employers exploiting company car taxation rules and extremely high marginal rates in the UK income tax system available only for certain individuals.
Although EVs are very much the technology of the future, the UK’s subsidy scheme is a throwback to the 1970s. Then, the highest marginal income tax rate was 83 per cent on earned income. This was levied on pay levels as low as £120,000 in today’s prices. But almost no one paid these tax rates.
In a recent analysis, Dan Neidle of the not-for-profit Tax Policy Associates highlighted the tax avoidance opportunities of the 1970s. There were lax tax rules for benefits in kind. High earners routinely took pay in other forms, whether it was company cars, luncheon vouchers, club memberships or extremely generous pensions.
The decades since have seen governments clamp down on loopholes, allowing them to collect more from those on high incomes at much lower tax rates.
But in recent years, extreme tax rates have stormed back with the withdrawal of both child benefits and personal allowances at £100,000, as well as a cliff edge on subsidised childcare.
It is not environmentalism but tax that is driving the emergence of salary sacrifice EV deals, encouraging a tax avoidance industry that does nothing for Britain’s productivity or public finances.
There are colleagues of mine with young children who would be better off if they signed up to the electric vehicle scheme, drove the car to their parents’ driveway and parked it up for three years. That is nuts.
