According to figures from the Society of Motor Manufacturers and Traders (SMMT), electric vehicles, whether full electric or different forms of hybrid, account for more than 25 per cent of the market in the year to this September, nearly doubling sales from the previous year. Of these 9.5 per cent, or 125,000, were fully electric.
A growing number of businesses are considering offering electric company cars thanks to the tax and cost benefits that they offer.
With company cars having a significant drain on finances, business owners can make significant savings by upgrading their fleet. So, what are the rules around low-emission cars and tax?
The importance of emissions
Company cars are taxed through Benefit-In-Kind (BIK), which classes vehicles as an extra taxable benefit that falls outside of a person’s regular salary.
The latest BIK rates follow the stricter European World Harmonised Light Vehicle Test Procedure (WLTP) emission and economy tests.
Because of this change, emissions are vital to the amount of company car tax paid and its means that most cars on paper will have higher CO2 (carbon dioxide) emissions, resulting in a higher rate of tax.
Be aware that this may unfairly disadvantage some company car users. To reflect this the Treasury has reduced the BIK rates used for older cars registered under the new WLTP system by two per cent during the last tax year.
However, this reduction has now fallen to one per cent in the 2021/22 financial year and will disappear altogether next year; meaning that there will be no reduction in the BIK rate for these vehicles from April 2022.
It is important to note that BIK rates change annually and may differ after April 2022, so it is best to check before purchasing or leasing a vehicle.
Selecting a tax-efficient vehicle
Companies should use the latest car tax rates to reduce their BIK liabilities by selecting lower-emitting vehicles.
Diesel-engine vehicles were once the most tax-efficient choice for many companies many do not meet the Real Driving Emissions (RDE2) element of WLTP tests and are subject to a four per cent higher BIK rate than petrol cars.
More manufacturers are becoming aware of this and have started producing diesel models that meet these strict standards so that it is still possible to take advantage of the reduced tax rates that diesels incur from lower CO2 emissions.
However, advances in electric and hybrid technology mean these vehicles offer a more tax-efficient option for companies to utilise.
The Government is committed to ending the sale of new petrol and diesel cars by 2030. With this and the profound developments in electric car technology in mind, the days of the internal combustion engine may soon be numbered.
Additional benefits of electric cars
The Government has set up numerous tax incentives for both company car users and fleet operators who move to electric vehicles.
It is not surprising then that more businesses have either already made the switch or are giving serious consideration to doing so. Some of these incentives include the following:
- Benefits in Kind – Since April 2021, electric vehicles attract a one per cent tax rate on Benefit in Kind (BIK). This also applies to hybrid vehicles with emissions from 1 – 50g/km and a pure electric range of over 130 miles. This rate increases to two per cent in 2022/23, but it still makes electric and low emission cars very affordable in comparison to higher emission vehicles.
- Capital allowance – Cars with CO2 emissions of less than 50g/km are eligible for 100 per cent first-year capital allowances. This means that electric cars can deduct the full cost from your pre-tax profits.
- Congestion charge exemptions – Electric vehicles are exempt from congestion charging and clean air zone (CAZ) charges. As well as London, five cities have been required by the Government to introduce a Clean Air Zone, including, Leeds, Birmingham, Nottingham, Derby and Southampton. If your company vehicles travel into areas where clean air zones exist, there will be cost savings for your business if you switch to electric.
- Electric charge points and charging costs – Any business that installs charging points for electric vehicles between now and 31 March 2023, can claim a 100 per cent first-year allowance for these costs.
- Electric vans – The taxable benefit for having the private use of a zero-emission van were reduced to nil from April 2021. The previous year, electric vans were taxed at 80 per cent of the benefit for a normal van.
- Government grants – The Government’s plug-in car grant provides 35 per cent of the purchase price up to £2,500 towards the cost of an eligible plug-in vehicle costing less than £35,000. This plug-in car grant applies at the time of purchase and is typically given as a discount on the purchase price of a vehicle.
- Leasing – Leasing a vehicle through a VAT registered company allows you to claim back 50 per cent of the VAT on monthly payments and up to 100 per cent of the VAT on the maintenance agreement, which you are not allowed to do when buying a vehicle outright.
- Salary sacrifice – Where an electric car is provided under salary sacrifice, the optional remuneration rules do not apply.
- Tax bands for low emission vehicles – 11 new tax bands for vehicles with emissions of 75g/km and below have been introduced. The Government has also announced the tax rate for the next three years, helping businesses to plan. Electric and hybrid vehicles pay no or very little vehicle excise duty.
Need help choosing your next company car?
If you would like tax advice on issues relating to company vehicles, please get in touch.