The main obstacle to offering a member of staff (including directors and business owners who are employees) a petrol or diesel company car is the fact they add to their personal tax burden. This means many employees opt out of company car schemes to avoid paying benefit in kind tax, which reflects the monetary value and emissions of the vehicle.
After doing the sums, many employees find it more cost-effective to use their own vehicle and then claim back the mileage. Or as a business owner, it’s more tax efficient to draw dividends rather than buy the car through the business. In short, the company car tax rules mean a petrol or diesel vehicle is no longer seen as a perk, so businesses miss out on the taxable benefits such as capital allowance reliefs.
What are the benefit in kind rates for electric cars?
Electric cars have reshaped the company car landscape causing both businesses and employees to think again. Due to their zero emissions, electric cars attract very favourable benefit in kind rates while offering tax reliefs to companies that purchase them.
The benefit in kind rate for a fully electric car is just 2%, and this will remain unchanged through the 2022/23, 2023/24 and 2024/25 tax years. In comparison, the benefit in kind rate for the most polluting petrol or diesel cars is a whopping 37%!
For the full benefit in kind rates for company vehicles, please visit the HMRC website.
How much company car tax will my business pay?
Every company vehicle has a benefit in kind value which is based on the value of the car including VAT, optional extras and the delivery fee, plus its CO2 emissions. The company is required to pay class 1A Employers National Insurance, being 15.05%, on the benefit in kind value. This is declared on a P11D form which is required to be submitted every year on 6th July for the previous tax year.
Every year businesses also must declare this figure to HMRC on a P46 (Car) form.
How much will an employee pay?
The tax liability for employees will depend upon the benefit in kind rate of the vehicle, its benefit in kind value and the individual’s income-tax bracket. To help you, use this formula: (benefit in kind value) x (benefit in kind tax rate) x (income-tax bracket) = benefit in kind tax.
What other company car tax reliefs are available?
While company cars do not qualify for annual investment allowance (AIA), the cost of acquiring a commercial vehicle is allowable. Therefore businesses need to establish if a vehicle qualifies as a commercial vehicle. There is an AIA cap of £200,000 for purchases from 1 January 2022.
If your business intends to buy its vehicles, rather than lease them, they could qualify for a 100% first-year allowance (FYA). For this to apply, the CO2 emissions must not exceed 0g/km and the cars need to be brand new (section 45D of the Capital Allowances Act 2001). This will result in full corporate tax relief to the business on the cost of the company car in the year of its purchase, so a £35,000 electric vehicle would produce a tax relief saving of £6,650.
Other benefits of zero emissions vehicles include reduced road tax, exemption from London’s Ultra Low Emission Zone (ULEZ) and congestion charges. There is also a plug-in grant of up to £1,500 for electric cars and £5,000 for vans.
What are the downsides of electric cars?
Before you acquire an electric car for your company, it is advisable to do the sums and to consider the practicalities. Electric vehicles are more expensive than petrol or diesel models, so you will need to factor this into your calculations.
The charging point infrastructure is improving across the UK, but you will need to check the facilities available near your business, clients and employees. For example, can your employee charge an electric car at home?
If any of your employees have a high annual mileage, you will need to investigate the impact of switching to an electric car with limited range.
If you would like to explore the business benefits of electric cars, our friendly team are experts on company car tax. Call us on 0845 606 9632 or email email@example.com.