Important Company Car Tax Changes from April 2020
I guess we all remember the diesel car emissions scandal which involved, in effect, deliberate manipulation of the CO2 emissions figures for diesel cars. In January 2017, VW pleaded guilty to the emissions scandal and had to pay $4.3 billion USD in penalties.
This, in turn, led to the implementation of Worldwide harmonised Light vehicles Test Procedure (WLTP) revised emissions figures. On average, WLTP results in reported CO2 values that are about 20-25% higher than under the old system.
This will result in higher taxation for most company cars for employees and company directors from April 2020.
(The higher taxation only applies to cars registered from April 2020, not any existing company cars)
Is there any way around this? Yes, in either of the following two ways:
- Pay car allowance instead of a providing a company car
- Provide an all-electric car (with new electric car buying options expanding every month and most car manufacturers rolling out new models prior to April 2020, there should be sensible options available)
In the 2020/21 tax year, fully electric cars will be eligible for a 0% Benefit In Kind (BIK) rate. The BIK rate is set to rise to 1% in 2021/22, although this seems to change fairly regularly and is not guaranteed.
As electricity is not classed as a road fuel, electric cars have no fuel benefit charge. That means employees are exempt from paying benefit-in-kind on electricity provided by their employer to charge an electric company car.
By comparison the average petrol or diesel vehicle has a BIK rate of 25-37%. So by switching to electric the employee can typically save over £5,000 per annum in tax (based on a car with a list price of £36,000, 37% BIK and a 40% taxpayer)
Salary Sacrifice enables employees to sacrifice some of their gross salary in order to receive the benefit of driving a fully electric company car. As the sacrifice is executed before tax and National Insurance contributions are applied, employees effectively save costs in the acquisition of their new car.
The company typically saves around £150 per month in Class 1A NIC (based on the same example) and this saving can be used to offset the higher monthly cost of the electric car.
The rules are complex so should you need help with the calculations, please do not hesitate to contact us.