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That’s my fault. Last year, the Financial Times introduced a new payroll sacrifice scheme, allowing employees to lease and drive electric vehicles at a low cost. This scheme promises a “up to 40%” savings. I love bargains and I don’t really need or want an EV right now, but this offer was intrigued.
Sign up, I plugged many different fake pay levels into the system, changed age, changed addresses, and got a sense of the dynamics underlying the scheme, including car insurance. Of course, the activity seems very interested in me and has since been troubled by EV providers and is about to sign on the dotted line.
The example I saw is that if you are a regular base tax rate or a higher taxpayer, the example I saw was little worth it, but I’ve done math before, and this transaction was pretty good. If your salary was a paid bracket between £100,000 and £125,140, this offer saved me a lot of money. People in the UK lose their personal tax allowance and pay 62% of employees’ national insurance premiums (UK Social Security Tax) in total. For those who need to pay less than £100,000 to get more value with free childcare, such a salary sacrifice scheme is simple.
FT saves 15% on lower employer national insurance contributions and also has value-added tax benefits. Employees are charged a 3% profit on the type of tax on the implicit value of profits received in lieu of their pay.
I emailed so many Peating representatives from the provider and asked why they couldn’t offer a lower price when there was a great possibility of avoiding tax. Not surprisingly, I wasn’t too happy and was told correctly that instead of leasing an EV from my tax payroll, it would still be better if I signed up.
What is going on? Employers save some money on payroll taxes, employees get something like bargains depending on their situation, and providers have potentially profitable businesses.
This is a very bad example of public policy. The government has an absolutely legitimate desire to speed up the deployment of EVs, but it should offer simple discounts rather than opaque and large subsidies to employers who misuse the company’s automobile tax rules and very high marginal taxes in the UK income tax system available to certain individuals.
EVs are a future technology, but the UK subsidy system is a throwback to the 1970s. The highest marginal income tax rate since then was 83% of earned income. This was collected at a low wage level of £120,000 at today’s prices. However, few people paid these tax rates.
In a recent analysis, Dan Nadl, a nonprofit tax policy associates, highlighted the tax avoidance opportunities in the 1970s. There were loose tax rules for the kind of profit. High-income earners received their salary on a daily basis in other forms, such as company cars, luncheon parties, club memberships, or extremely generous pensions.
For decades since then, governments have seen round out loopholes and have been able to gather more from people with higher incomes at much lower tax rates.
However, in recent years, extreme tax rates have skyrocketed at the edge of the cliffs of subsidized childcare, with the withdrawal of £100,000 in both child benefits and personal allowances.
It is taxes that drive the emergence of payroll sacrifice EV transactions rather than environmentalism, and encourage a tax avoidance industry that does nothing for UK productivity and finances.
If you sign up for an FT electric vehicle scheme, drive the car in the parent’s driveway and park for 3 years, then I have my colleagues with my young child. It’s nuts.
chris.giles@ft.com
