With concerns over climate change hitting the headlines, it is perhaps appropriate that the company car tax regime seeks to encourage ‘green’ choices; and rewards those who opt for cheaper lower emission cars with lower tax bills.
As of 6 April 2020, the way in which carbon dioxide emissions for cars are measured has changed – moving from the New European Driving Cycle (NEDC) (used for cars registered prior to 6 April 2020) to the Worldwide Light Testing Procedure (WLTP) for cars registered on or after 6 April 2020.
PERSONAL TAX IMPLICATIONS
Zero-emission cars
As part of the transition, the appropriate percentage for zero-emission cars used to calculate the benefit in kind is reduced to 0% for 2020/21, to 1% for 2021/22 and 2% for 2022/23, which will remain fixed for at least three years. This applies regardless of when the car was registered.
Impact
Electric company car drivers enjoy a tax reduction. As the appropriate percentage to calculate the benefit in kind fell to 0% from 6th April 2020 from 16% the previous year (2019/20). This means that those who have opted for an electric company car can enjoy the benefit tax-free in 2020/21. Their employers will also be relieved of the associated Class 1A National Insurance charge.
Example
Mr X has an electric company car throughout 2020/21, 2021/22 and 2022/23. The car has a list price of £32,000. Mr X is a higher rate taxpayer.
- In 2020/21, the appropriate percentage is 0% so there is no tax or Class 1A National Insurance to pay. This is a significant reduction compared to 2019/20 as the BIK charge would’ve been 16% of the list price equal to £5,120, on which the tax is £2,048 (assuming a 40% tax rate) and the class 1A National Insurance is £707.
- In 2021/22, the charge is 1% of the list price, equal to £320, on which the tax is £128 (assuming a 40% tax rate) and the Class 1A National Insurance is £44.
- From 2022/23 the charge is 2% of the list price – equal to £640.
Not quite zero emissions
- It is also possible to enjoy a company car tax-free in 2020/21 if it is registered on or after 6 April 2020, has emissions of between 1 and 50g/km (measured under the WLTP) and an electric range of at least 130 miles.
CORPORATION TAX IMPLICATIONS
As well as the above there may be significant corporation tax savings available to companies who choose to acquire lower emissions vehicles for the team by way of capital allowances.
FYA – First-year allowance
- enable you to claim the full 100% of the cost of eligible assets in the same accounting period.
WDA – Writing down allowance
- allow you to deduct a percentage of the value of an item from your profits each year.
For Cars bought from April 2021:
| New and unused, CO2 emissions are 0g/km (or car is electric) | 100% FYA |
| New and unused, CO2 emissions are between 1g/km and 50g/km | 18% WDA |
| Second hand, CO2 emissions are between 1g/km and 50g/km (or car is electric) | 18% WDA |
| New or second hand, CO2 emissions are above 50g/km | 6% WDA |
Example
X Limited is thinking about purchasing an electric car with 0g/km CO2 emissions and would like to compare the benefits versus a car with CO2 emissions above 50g/km.
Assume the cost of the car is £32,000 and the taxable profits before the purchase of the car for X limited were £100,000
| Low Emissions | Emissions above 50g/km | |
| Taxable profits | £100,000 | £100,000 |
| Less FYA (100%) | -£32,000 | |
| Less WDA (6%) | -£1,920 | |
| Adjusted Taxable profits | £68,000 | £98,080 |
| Corporation Tax payable (19%) | £12,920 | £18,636 |
By choosing to acquire a low emission car X limited has saved approximately £6k in the year by claiming FYA’s.
The Next Steps
If you are thinking about purchasing a low emission car that works for both the business and the employees in the most cash and tax-advantageous way then give us a call on 0161 711 0810.
