Tax Savings for Electric Cars
In a bid to encourage the purchase of electric and low-emission cars by businesses across the UK, HMRC has lowered tax rates on these vehicles.
Reduction in Employee Income Tax
Known as a Benefit in Kind (BIK), employees are currently taxed on the benefit they receive by having a company car available for personal use.
The BIK value is currently calculated at 16% of the current market value for those vehicles with emissions below 50g/km and at least 19% of the market value for those with emissions above that.
HMRC has introduced changes that will come into effect as of April 2020 which allow individuals driving electric cars to incur almost a zero tax charge for the use of their company vehicle.
The proposed new sliding scale for Electric Cars Benefit in Kind Rates is as follows:
|Emissions and range||BIK 2019 / 20||BIK 2020 / 21|
|1-50g/km >130 miles||16%||2%|
|1-50g/km 70-129 miles||16%||5%|
|1-50g/km 40-69 miles||16%||8%|
|1-50g/km 30-39 miles||16%||12%|
|1-50g/km <30 miles||16%||14%|
As outlined in the table above, the rate will be dependent on how far the car may be driven and the level of emissions. This means that hybrids may also benefit from the changes.
The formula for calculating the tax payable is:
BIK value = (Vehicle list price + optional extras value + delivery fee + VAT) X BIK rate
Tax = BIK value X relevant personal tax rate
Current versus future calculation for company car tax:
- A company employee drives a zero emissions car for both the 2019/20 and 2020/21 tax years.
- The car has a benefit in kind value of £100,000.
- For the avoidance of doubt the car has emissions of 0g/km.
- The employee sits in the higher tax bracket and pays tax at 40%.
- 2019/20 = £100,000 * 16% = £16,000 (BIK value)
Tax = £16,000 * 40% = £6,400 per annum
- 2020/21 = £100,000 * 2% = £2,000 (BIK value)
Tax = £2,000 * 40% = £800 per annum
This equates to the employee saving tax of £5,600.
The employee is not the only one who will benefit from changes.
Class 1A NIC
Employers are also currently required to make Class 1A National Insurance Contributions (NIC) on company cars, as on well as on any private use fuel the employer provides for the employee. As with the company car tax attracted by individuals, the NIC is related to the benefit value and emissions.
This Class 1A NIC is currently charged at 13.8% of the value of “Benefits in Kind” offered to employees. The lower the benefit, the lower the Class 1A charge
After years of increasing company car tax, it is evident that the best way to reduce the annual tax payments on company cars for both the employee and the employer is to buy a low-emission car. Fully electric and hybrid cars will be attracting the lowest tax rates from 6 April 2020 and you may wish to consider this when choosing your next company car.
For advice on your company car tax or Class 1A NIC, Please contact us at: firstname.lastname@example.org.