Company cars have remained a popular employee benefit for many years to retain and reward hard-working employees.
Given the complexity of the tax regulations and incentives surrounding company cars in more recent years, companies and employees are finding them less enticing.
However, the new rules surrounding electric and low emission vehicles means there are still potential savings to be made.
Company car tax, officially referred to as Benefit-In-Kind (BIK) tax, classes a vehicle as an extra taxable benefit that falls outside of a person’s regular salary.
The latest BIK rates for the financial year started on 6 April 2021. These follow on from rules in the previous tax year, which saw changes because of the European World Harmonised Light Vehicle Test Procedure (WLTP) emission and economy tests.
Because of this, emissions are vital to the amount of company car tax paid. These new WLTP tests mean that most cars on paper will have higher CO2 (carbon dioxide) emissions, resulting in a higher rate of tax.
Be aware that this may unfairly disadvantage some company car users. To reflect this the Treasury have reduced the BIK rates used for older, NEDC-assessed cars registered under the new WLTP system by two per cent during the last tax year.
However, this reduction has now fallen to one per cent in the 2021/22 financial year and will disappear altogether next year; meaning that there will be no reduction in the BIK rate for these vehicles from April 2022.
It is important to note that BiK rates change annually and may differ after April 2022, so it is best to check before purchasing or leasing a vehicle.
Choosing a vehicle
Businesses and employees should be able to determine which vehicles suit their needs and can reduce their BIK liabilities if they review these latest car tax rates.
Diesel-engine vehicles may once have been the most tax-efficient choice for many companies. But if they do not meet the Real Driving Emissions (RDE2) element of WLTP tests, they will be subject to a four per cent higher BIK rate than petrol cars.
More manufacturers are becoming aware of this and have started producing models that meet these strict standards so that it is still possible to take advantage of the reduced tax rates that diesels incur from lower CO2 emissions.
Despite this, advances in electric and hybrid technology may be an even more tax-efficient solution for companies to utilise.
The Government is committed to ending the sale of new petrol and diesel cars by 2030. With this and the profound developments in electric car technology in mind, the days of the internal combustion engine seem to be numbered.
The benefits of electric cars There are numerous tax incentives, set up by the Government, for both company car users and fleet operators who move to electric vehicles.
Because of this, more and more businesses have either already made the switch or are giving serious consideration to doing so. Some of these incentives include the following:
- Benefits in Kind: Since April 2021, electric vehicles attract a one per cent tax rate on Benefit in Kind (BIK). This also applies to hybrid vehicles with emissions from 1 – 50g/km and a pure electric range of over 130 miles. This rate increases to two per cent in 2022/23, but it still makes electric and low emission cars very affordable in comparison to higher emission vehicles.
- Salary sacrifice: Where an electric car is provided under salary sacrifice, the optional remuneration rules do not apply.
- Tax bands for low emission vehicles: 11 new tax bands for vehicles with emissions of 75g/km and below have been introduced. The Government has also announced the tax rate for the next three years, helping businesses to plan ahead.
- Pure electric vehicles attract zero vehicle excise duty and even avoid the supplement for cars with a price of £40,000 or more. This could save owners and businesses thousands of pounds.
- Capital allowance: Cars with CO2 emissions of less than 50g/km are also eligible for 100 per cent first-year capital allowances. This means that electric cars can deduct the full cost from your pre-tax profits.
- Congestion charge exemptions: Electric vehicles are exempt from congestion charging and clean air zone (CAZ) charges. As well as London, five cities have been required by the Government to introduce a Clean Air Zone, including, Leeds, Birmingham, Nottingham, Derby and Southampton. If your company vehicles travel into areas where clean air zones exist, there will be cost savings for your business if you switch to electric.
- Electric vans: The taxable benefit for having the private use of a zero-emission van were reduced to nil from April 2021. The previous year, electric vans were taxed at 80 per cent of the benefit for a normal van.
- Government grants: The Government’s plug-in car grant provides 35 per cent of the purchase price up to £2,500 towards the cost of an eligible plug-in vehicle costing less than £35,000. This plug-in car grant applies at the time of purchase and is typically given as a discount on the purchase price of a vehicle.
- Leasing vs Buying – Leasing a vehicle through a VAT registered company allows you to claim back 50 per cent of the VAT on monthly payments and up to 100 per cent of the VAT on the maintenance agreement, which you are not allowed to do when buying a vehicle outright.
- Electric charge points and charging costs: Any business that installs charging points for electric vehicles between now and 31 March 2023, can claim a 100 per cent first-year allowance for these costs.
Choosing your next company vehicle can often be difficult, given all of these recent changes to rules regarding Benefit-In-Kind and the grants that are available.
If you would like advice on the tax benefits of electric company cars and vehicles, please contact your Seymour Taylor representative today or email email@example.com or call 01494552100.
This blog is for guidance only, professional advice should be obtained before acting on any information contained herein. The information was correct at the time of publishing on 30 June 2021.