If the answer is “yes” each time you see your tax code taking large amounts of PAYE for the company car that you drive, redemption may not be far away. It may however require a change in thinking and behaviour, which is exactly what is intended by the changes in the company car tax regime being introduced in April 2020.
Most of us remember the encouragement we were given through the tax system to steer us away from petrol engines to diesel. From next tax year we will be encouraged to change to electric or low emission cars. As outlined below, the sizeable tax saving which will be available should make you at least consider switching to “cleaner” cars.
What are the current rates of Benefit in Kind (BIK) for company cars?
Petrol and RDE2 compliant diesel cars:
- Start at 19% of the list price when new.
- Increase to 37% in 1% increments as CO2/km increases.
- Non RDE2 compliant diesels suffer a further 4% additional charge.
Electric and hybrid cars:
- Are treated more generously, but still suffer a charge between 13% and 16% of the list price when new.
From April 2020, the BIK% on new fully electric cars, or cars emitting up to 50 grams CO2/km with at least 130 miles electric only range, is reducing to 2%.
That is worth repeating, 2%!
This would mean a large reduction in your company car tax (ignoring a fuel tax charge for simplicity and using the HMRC calculator).
Example: a diesel car costing the same as a basic Tesla Model S £72,400, and emitting 210 grams CO2/km, would cost:
- A 20% marginal rate taxpayer £5,358 tax/year, or £447/month, and
- a 40% marginal rate taxpayer £10,715 tax/year, or £893/month.
Example: a basic Model S Tesla would currently cost:
- A 20% marginal rate taxpayer £2,317 tax/year, or £193/month.
- A 40% marginal rate taxpayer £4,634 tax/year, or £386/month.
From 6 April 2020:
- The “gas guzzlers” will face increasing rates of tax, as the highest 37% rate is brought into effect for ever reducing CO2 bands.
- Nil and low emission cars costing £72,400 will have their BIK charges slashed, such that tax costs would reduce to:
£290/year or £24/month for a 20% marginal rate taxpayer.
£580/year or £48/month for a 40% marginal rate taxpayer, and at worst,
£652/year or £54/month if the whole BIK was taxed at 45%.
- Nil and low emission cars (< 50g CO2/km) attract first year capital allowances.
- As the BIK tax charge comes down, so would the Company NIC Class 1A liability reduce (13.8% of the lower BIK charge).
- We were once encouraged to buy diesel - will the benefits to buy electric be retracted in the future? Seems unlikely.
- Do electric and low emission cars have sufficient range for you with the existing infrastructure? Both will improve over time.
- These tax advantages are not yet widely appreciated, but when they are, demand for electric and low emission cars is likely to increase as “gas guzzlers” are traded in.
- There are Government grants up to £3,500 for the purchase of such no and low emission vehicles; find out more here: https://www.gov.uk/plug-in-car-van-grants
Employees charging their own electric cars?
Rules already exist to allow employers to install charging facilities for electric and plug-in hybrid cars and vans, provided:
- It is available to all employees.
- It is at premises under the control of the employer (i.e. not at the employee home).
Once installed, this is specifically exempted from an income tax charge on employees as a BIK.
So, provided you’re confident that electric and low emission car ranges are sufficient for your needs, taking another look at these cars will soon become very worthwhile for tax purposes, as well as reducing your carbon footprint and impact on the planet. It is however a complicated area so please contact Paul Roe, Partner here or on +44 (0)330 124 1399 if you would like to learn more.