There’s no question that the world is becoming more conscious of our environment, and this is reflected in the number of electric and low emission vehicles on our roads. It’s not just individuals that are going green – companies are starting to get in on the action as well, in order to keep up with their climate-friendly ethos. To encourage this positive trend, the government are making company car tax changes in 2020.
The current system for taxing company cars is much the same as it has been since its inception in April 2002. This system works by charging a percentage of the car’s list price based on the car’s carbon dioxide emissions, thus encouraging the use of more environmentally friendly vehicles.
The new changes come about as a result of the roll-out of the Worldwide Harmonised Light Vehicle Test Procedure (WLTP), which was introduced on September 1st 2019. The results from this caused HM Treasuring to reassess published BIK rates for 2020/21.
What Is BIK Tax?
BIK stands for Benefit in Kind and is a tax that you pay on what is commonly known as ‘company perks’. These are company benefits that will be provided on top of your salary by your employer, and can include accommodation, loans, company cars and so on.
Some company benefits are tax free but those which you do need to pay tax on, such as the use of a company car, the amount of tax you are required to pay depends on a range of factors, including the value of the benefit.
Can You Reduce Your Company Car Tax?
There are various ways that you can reduce the amount of tax that you are required to pay on a company car, including only using the car part of the time, or making a voluntary contribution to the fees. However, one of the best ways of reducing tax now, thanks to the changes, is choosing an electric (EV) or low-emission company car.
What Are The Changes?
From April 6th 2020, the way that BIK tax is calculated will change. Cars with lower CO2 emissions will henceforth be taxed at a much lower rate than those driving higher-emission vehicles.
As an example, a vehicle which is within the 1-50 g/km of CO2 bracket will enjoy a tax rate drop from 16% to 2%. For those who have fully electric vehicles and thus no CO2 emissions, the BIK rate for 2020/21 will be 0% – so they won’t have to pay this tax at all for their company car.
It is likely that the rate will increase to 1% in 2021/22, but the intention is to keep the rate as low as possible to encourage companies and employees to go green long term. Employees also won’t have to pay a fuel benefit charge on an EV, as electricity isn’t classified as a road fuel.
To show how much switching to an electric vehicle could save you, the average petrol vehicle has a BIK rate of around 25-37%. Based on a car with a list price of £36,000, 37% BIK and 40% taxpayer, an employee can save over £5,000 per year in tax.
How To Work Out Your Company Car Tax
Still unsure whether or not making the switch is worthwhile to you? You can work out how much tax you’ll need to pay on your current company vehicle as so.
- Find out your car’s P11D value. This is the list price of your vehicle and your employer should have a record of this that they can give to you.
- Find out the CO2 emissions of your car. This will be worked out according to the official listed CO2 emissions of the make and model of your vehicle. This is easy to find out as the HMRC website has a tool to tell you, if you just enter the details of your car.
- Find out your car tax band. If you use the HMRC tool you should also be told the company car tax band you fall into.
Once you have all of this information you can do the calculation that will tell you the taxable value of your car. Just multiply the P11D value of the car by the CO2 tax rate given to you by the HMRC website. The figure you are left with can then be multiplied by your income tax rate (which will be 20%, 40% or 50% – your payslips should be able to tell you if you are unsure). This total is the amount of BIK tax you will need to pay on your current vehicle.
P11D x CO2 tax rate x Your income tax rate = BIK tax to pay per year
Once you know how much BIK tax you are looking to pay on your current vehicle, you can make the decision as to whether or not it is more value for money for you to switch to a lower-emission vehicle. Ask your employer if they would consider switching you to one of these types of cars.
Most employers will be happy to do so as it boosts the reputation of the business if they are seen to be making a positive step towards being more environmentally friendly.
Aside from the current tax changes, there are a number of other benefits to switching to an electric vehicle. These include:
- Lower congestion charges. Some areas of London are introducing Clean Air Zones, where electric cars can drive for free in the congestion zone, as well as in Ultra Low Emission Zones.
- Cheaper to fuel. Electric cars are substantially cheaper to run than traditional petrol or diesel vehicles. A single £2 charge can take some vehicles more than 100 miles, which would be a cost of more than £11 when running a petrol car.
- Government grants. For those who do make the switch to electric, the government has grants available towards helping people to get charging points installed in their home or workplace so that they are always able to charge up.
Find Out More
Company car taxation is an issue that often has left many small businesses confusion and these changes will do nothing to alleviate that. There are other ways to get your staff behind the whel, such as through a salary sacrifice scheme. Working out the best way to finance company vehicles and make them available to staff is often a struggle.
The team at TFMC can help you make the decision that is best for you and your staff in this area, and if you need to have a discussion about this, or any other accountancy issues, then call us on 0800 470 4820 or send us an email at [email protected].