News

Tuesday 1st August 2017

Low emission company cars

Following on from the government’s announcement last week that the sale of new diesel and petrol cars will be banned from 2040, we take a look at the rules for company cars and how they are changing.

When a company provides a car for use by an employee, the employee pays tax and the employer pays National Insurance on the benefit that the employee receives.

The government wants to encourage the take-up of ultra-low emission vehicles (ULEVs), and has reformed the banding structure of percentages, to reduce how much an employee is taxed on their company car. An ultra-low emission vehicle is defined as having emissions below 75g of CO2 per km.

However, over the next 3 years, the rates are actually going to increase because of earlier legislation, before they decrease in 2020/21. The table below shows the rates for ULEVs up until 2020/21, when the lower banding rates will be introduced. Cars over 75g/km have higher rates, up to 37% for the most polluting.

Company Car tax rates
CO2 emissions Zero emission mileage 2017/18 % 2018/19 % 2019/20 % 2020/21 %
0   9 13 16 2
1-50 >130 9 13 16 2
1-50 70-129 9 13 16 5
1-50 40-69 9 13 16 8
1-50 30-39 9 13 16 12
1-50 <30 9 13 16 14
51-54   13 16 19 15
55-59   13 16 19 16
60-64   13 16 19 17
65-69   13 16 19 18
70-74   13 16 19 19
75-79   17 19 19 20

How is an employee’s tax calculated?

The car manufacturer’s list price is multiplied by a percentage based on the CO2 emissions of the car, as shown in the table above. This gives the “car benefit” figure, on which you will then pay tax at 20% / 40% / 45%, depending on how much you earn. You don’t have to pay national insurance; your employer will pay this instead.

Example

A basic rate tax payer is provided a 57g/km car for the whole of 2020/21 tax year, and the list price is £25,000.
£25,000 x 16% (from the table) = £4,000
£4,000 x 20% basic rate of tax = £800 tax for employee to pay
£4,000 x 13.8% Class 1A national insurance = £552 NI for employer to pay
If the car provided fell instead into the lowest band at 2%, the employee would only pay £80 tax.

ULEVs are excluded from the new salary sacrifice rules as detailed in our earlier article, and can therefore be a great way to provide a desirable benefit to employees and reduce tax and national insurance.

How does the business/employer claim tax relief for the purchase of the car?

The capital allowances a business can claim are also based on the CO2 emissions. You can deduct the full cost of a new car from your profits before tax in the year you bought it, if the emissions are 50g/km or less (currently 75g/km until March 2018).

From April 2018:
50g/km or less: 100% of the cost in the first year
51g/km – 110g/km: 18% of the cost each year, on a reducing balance basis
Over 110g/km and all second hand cars: 8% of the cost per year, on a reducing balance basis

To summarise, by 2020/21, ULEVS could be a great way to provide tax efficient benefits to employees and improve the environment.

  • Car tax rates as low as 2%
  • Excluded from new salary sacrifice rules (ORA)
  • Qualify for 100% first year Capital Allowances.
  • Electric cars charged for as little as 2p per mile

For an owner/director of a company, a new car could be wholly deductible for tax in the first year, and the annual tax and NI on the benefit could be less than 1% of the car’s list price.

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