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Company car drivers face tax hike under Lib Dem proposals

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Company car drivers would face a tax hike while salary sacrifice schemes would be undermined if Liberal Democrat proposals are adopted.

The party has published a report Policies for the Reform of Taxation ahead of the autumn conference season, with the suggestion that employees should pay National Insurance on benefits in kind.

However, tax specialist Jeff Whitcombe, of BCF Wessex, has warned that if the proposal became Government policy it would drive up costs for employees, as well as employers. 

He said: “Job-need drivers would still have to have a company car, but they may require additional salary from their employers to compensate them for the additional NIC.” 

Meanwhile perk drivers, who are most likely to be higher or additional rate taxpayers, would be more likely to shoulder the marginal additional NIC rather than withdraw from their company car scheme.

Whitcombe added: “Another significant factor that may have been overlooked is the adverse effect that such a policy would have on basic rate taxpayers compared to those taxed at the higher or additional rates.

“In 2013/14, employees earning more than £41,450 pay a marginal rate of NIC of just 2%, whereas those earning below this threshold pay NIC at up to 12% (where they are contracted into the State Second Pension).”

Changes could impact salary sacrifice for cars

For example, the impact of applying employee’s NIC to a company car, in this case a BMW 316d SE with a list price of £25,730 and emissions of 118g/km, is much more significant for a basic rate taxpayer (see table below).

Whitcombe also warned that proposed changes could impact on salary sacrifice for cars. He said: “The imposition of employee NIC on benefits would significantly undermine the savings available for basic rate taxpayers, who generally benefit the most under the current tax regime.”     

Class 1 employee NICs are currently payable only on earned income. Unlike income tax, they are not currently levied on many benefits in kind, such as company cars and medical insurance. These benefits, however, are often taken in lieu of salary (under salary sacrifice schemes) and include many goods and services which other employees, without access to such schemes, must purchase out of their post-tax (and post-NICs) income.

The Liberal Democrats believe that these benefits, which are effectively a form of income, would, in a fair system, be taxed in the same way as income.

However, the BVRLA believes the proposals would have a major impact on the take-up of company cars if introduced.

BVRLA legal and policy director Jay Parmar said: “We don’t think the Liberal Democrats have fully understood the implications of their proposals.

“Reducing the attractiveness of company cars will have a major impact on new registrations in the UK and increase the use of older, more polluting vehicles. We will be raising these concerns with the Parliamentary Under Secretary for Transport, Liberal Democrat MP Norman Baker.”

Complexity of tax change underestimated

Whitcombe told Fleet News the complexity of applying employee’s NIC to benefits in kind may have been underestimated.

“For many years HMRC has grappled with the concept of payrolling benefits, that is taxing benefits via PAYE, and, while it allows some employers to operate in this way, it has shied away from implementing the approach across the board because it would have far-reaching consequences,” he said.

In 2011, Chancellor George Osborne suggested he would like to simplify the operation of PAYE and NIC, and would like to consult upon the merger of income tax and NIC. 

However, given the difficulties that will have to be overcome to successfully merge the income tax and NIC, or to even streamline the operation of PAYE and NIC, the proposals have been effectively shelved until RTI (operating PAYE in real-time) and Universal Credit – the simplification of benefits into one single payment – have been fully implemented.

Whitcombe said: “The application of employee NIC on their company car would represent the imposition of a tax on jobs.

“Given employers and other significant organisations, such as the CBI and the TaxPayers’ Alliance, argue that taxing jobs is detrimental to job creation and economic growth, I envisage strong opposition to the application of employee NIC to benefits in kind without a fundamental simplification of income tax and NIC, which is unlikely to be taken forward for many years.”

Significant impact on base rate taxpayer


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  • Rob Chisholm, M.D., Applewood Vehicle Finance Ltd - 11/09/2013 12:46

    This is a typical Lib Dem proposal i.e. making a proposal before considering all of the implications. However, the one area where I do have some sympathy with them is with regard to Salary Sacrifice/Cash for Cars schemes. As I understand it a Benefit in Kind tax is payable where an employee benefits from something by virtue of their employment and which they would not benefit from otherwise. Considering that the Terms a vehicle is acquired on through many such schemes would be difficult to obtain outside of your employment then I fail to see how they can escape BiK on that benefit. The Treasury should also actively encourage the use of company cars - they are shown, in the main, to be the cleanest and best maintained vehicles on the road. They are also replaced on a regular basis thereby keeping factories and supported industries/services in business. Lastly, and I know full well that we wouldn't be able to slip this past the EUSSR, I would dearly like to see a reduced level of BiK payable on vehicles manufactured in the UK, or failing that, those manufactured in the EU. Dream on, eh?

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