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.
|CO2 emissions||Zero emission mileage||2017/18 %||2018/19 %||2019/20 %||2020/21 %|
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.
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.