The example is based on a standard 22% tax payer earning £18,000 gross per year, or £1,500 per month.
Calculation One is made under a standard company car arrangement. The employee pays £268.53 in income tax, £49.01 in benefit in kind tax for his company car, and £121.40 in National Insurance per month.
His gross pay, therefore, faces total deductions of £438.94 per month, leaving him with a net salary of £1,061.06 per month.
Calculation Two is for the same employee with the same car, but this time funded under an ECO arrangement.
His gross pay remains £1,500 per year, his national insurance remains at £121.40, his income tax remains at £268.53, but he no longer pays benefit in kind tax.
Instead, he has signed a credit sale agreement with his employer to pay £500 per month to finance his ECO car. The first £49.01 of this sum comes directly from the benefit in kind tax saving.
The remaining £450.99 he owes actually comes from a net expense advance of £450.99 (from his employer). As this advance is for business expenses it does not incur tax, although the business motoring expenses must be reconciled at least annually by using mileage records.
Employers can use the Inland Revenue Approved Mileage Rates to reimburse business miles tax-free and NIC-free. If at reconciliation the employee has received too much in expense advances, tax is due on the excess element.
Overall, therefore, the employee's total monthly pay is £1,950.99 (£1,500 + £450.99 expense advance), his total payroll deductions are £889.93 (£268.53 in income tax, £121.40 in NIC and £500 for the credit sale agreement), leaving net pay of £1,061.06 – exactly the same figure as he receives under his current, orthodox company car arrangement.
Under the ECO, however, the employer enjoys the benefit of no longer paying Class 1A NICs on the provision of a company car, and also receives a payment from the employee equivalent to his current benefit in kind tax liability.
Calculation One: Current company car
Gross pay per month: £1,500.00 Inc tax: £317.54
Nat ins: £121.40
Total pay: £1,500.00
Total deducts: £438.94
Net pay: £1,061.06
NB: Within the deductions above is the £49.01 BIK tax as per working example.
Calculation Two: New under ECO
Gross pay per month: £1,500.00
Inc tax: £268.53
Nat ins: £121.40
Net expense advance: £450.99
Credit sale agreement: £500.00
Total pay: £1,950.99
Total deducts: £889.93
Net pay: £1,061.06.
NB: Net additional money equates to the Credit S.A. pay less Mr X's BIK tax £49.01.