A green light for electric cars

Company car drivers of electric and ultra-low emission vehicles were already looking forward to a significant decrease in their benefit in kind tax from 6 April 2020, but the government has taken this one step further by announcing that drivers of the cleanest cars will pay no tax charge at all. 

In a long-awaited response to its review of vehicle excise duty and company car tax testing procedures, the government recently rewrote the previously published benefit in kind rates for 2020/21, creating two new benefit in kind tables for those driving company cars depending on whether they are registered before or after 6 April 2020.

The problem with company cars

Company cars have long been used by businesses as an extra perk to reward and retain staff.  This reward scheme results in a benefit in kind tax for employees, as there is a monetary value attached to the ability to use the car privately.  

Historically, both company car tax and vehicle excise duty (more commonly known as “road tax”) are calculated based on a car’s CO2 emissions and official list price.  However, recent changes in emissions testing procedures have caused uncertainty over future tax rates and a subsequent decline in company cars being offered to employees. 

The good news

For cars registered after 6 April 2020, it looks like most company car tax rates will be reduced by two percentage points, which means that drivers of wholly electric cars (as well as certain hybrid cars) will have their benefit in kind tax charge calculated at 0% and pay no benefit in kind tax at all.

This relaxation is also extended to company car drivers of electric vehicles registered before 6 April 2020 who were already looking forward to a reduced benefit in kind tax charge.  From 6 April 2020, their relevant percentage was due to reduce from 16% to 2%, but this also now falls to 0%.

The relevant benefit in kind percentages will increase to 1% in 2021/22 and 2% in 2022/23, but this is nevertheless a great opportunity to consider electric vehicles as a low-tax option to the traditional company car. The savings can be quite dramatic, for example choosing a Tesla Model S over a comparable Mercedes S350 could deliver annual benefit in kind tax savings of £11,000 for a higher rate taxpayer.

Employers will also benefit from lower National Insurance costs with the employer’s saving in the illustration above being £1,500 per year.

The 2020/21 tax year is the sweet spot for buying an electric company car as a 100% First Year Allowance can be claimed, on top of the reduced benefit in kind and National Insurance charges. This differs to the main pool or special pool rates of 18% or 6% available for other vehicles, depending on the level of emissions. As an example, capital allowances for a Range Rover Sport and a Jaguar I-Pace would be £3,800 and £64,400 respectively (based on similar corresponding list prices of £63,390 and £64,440).

If you are looking to change your own company car, or if you are considering changing the cars used by your employees, please get in touch with your usual Ryecroft Glenton contact so that we can help you make informed decisions that save tax and National Insurance all round.

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