The upcoming ban on the sale of petrol and diesel cars in the UK has been brought forward from 2035 to 2030, and was originally planned for 2040. This underlines the Government’s desire to make the move to greener forms of transportation, and although hybrid vehicles will continue to be available after this date, their electric range will need to be “significant” in order for them to remain on sale after this date.
Recent changes made by the Government to company car benefit-in-kind (BIK) tax rates have been structured to further encourage company car users to make the switch to cars with lower levels of CO2 emissions and in particular electric vehicles. The tax incentives to go electric rather than electing for the conventional petrol and diesel alternatives is designed to speed up the change to greener alternatives.
It is worth noting that different BIK rates apply to cars registered before and after 6th April 2020 so the age of the vehicle may also affect the company car tax calculation.
For the 2021/22 tax year, cars registered from 6 April 2020 with zero CO2 emissions have a taxable BIK rate of just 1%, having increased from 0% in 2020/21, when there was no tax liability for being provided with an electric car by your employer! This compares with diesel cars which have a maximum BIK rate of 37%. The 1% rate also applies to cars producing between 1 and 50 g/km of CO2 with an electric range greater than 130 miles. For 2022/23 the taxable BIK rate increases again for these vehicles to 2% but will remain at this level until April 2025, so the tax benefits will continue to be in place for at least the next few years.
Even at 2% this is an extremely low taxable rate for the use of a company car, and this is illustrated in the below examples:
Option 1: a fully electric Jaguar I-PACE with a list price of £65,190 would attract an income tax charge, for a higher rate tax payer, of just £260 for 2021/22 (at 1%) and £521 per year for 2022/23 to 2024/25 (at 2%).
Option 2: a Jaguar F-PACE HSE with a list price of £63,630 and a BIK rate of 37% would result in an income tax charge for a higher rate taxpayer of £9,417 per year (at 37%).
Therefore the potential tax savings on cars with a similar list price but differing CO2 emissions can be as much as £9,000 per year. Due to the low BIK rate an electric car is also likely to offer tax savings when compared to less expensive petrol and diesel alternatives with higher BIK rates.
Where individuals may have concerns about making the move to a full electric car, a hybrid model may be worth considering and these may also offer tax savings over petrol and diesel cars. Hybrid vehicles with CO2 emissions between 1 and 50 g/km of CO2 are taxed based on the available range of a full electric charge, with the BIK rate increasing as the range of the car decreases. For 2021/22 a hybrid car with an electric range of less than 30 miles has a BIK rate of 13%.
From a business perspective cars with zero emissions may also be eligible for 100% first-year allowance until April 2025, so there are also tax benefits for the company when providing a zero emissions car. Electric vehicles are typically more expensive to purchase so this may have previously put off some employers from offering them to employees, however, these savings should also be factored in to any cost analysis of the different options.
Hybrid cars with CO2 emissions of 50g/km or less will attract writing down allowance at the main rate of 18%, whereas cars with a higher rate of emissions only attract a rate of just 6%.
Other benefits to providing fully electric company cars include an exemption from the Road Tax expensive car supplement, where cars with a list price over £40,000 (after options) attract an annual premium of £335 per year in addition to the standard road tax rate for the first five years after the first year charge. The above tax incentives are certainly helping to increase the popularity of electric vehicles and along with the improvement in technology and infrastructure of recent years, this is resulting in an increase in the use of electric vehicles as a tax planning opportunity for businesses and employees alike. If you’d like to discuss your options in more detail contact the team at Wells.