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February 26th 2020

Electric vehicles - reduced benefit in kind rates from 6 April 2020

If you provide an employee, or yourself as a director of your own company, with a company car which is available for private use (rather than a ‘pool car’), this is classed as a benefit-in-kind by HM Revenue and Customs, on which income tax and employer National Insurance is due. As small business accountants we are able to advise on all relevant aspects of the benefit in kind rules.

In the current tax year, a car with emissions of up to 50g/km has a benefit-in-kind value of 16% of its list price (manufacturer’s price when new, regardless of its current age or condition); this value is added to the employee’s income, on which the employee pays income tax at their marginal rate of tax (19-46%), and the employer pays National Insurance based on 13.8% of the benefit-in-kind value.

From 6 April 2020, the benefit-in-kind percentages are reducing for low-emission cars, and, for the first time, introducing rates based on the car’s electric range, for cars with emissions of 1-50g/km:

Car C02 Emissions

Cars registered before 6 April 2020

Cars registered after 5 April 2020

2020/21

2021/22

2022/23

2020/21

2021/22

2022/23

0g/km

0%

1%

2%

0%

1%

2%

1-50k/gm (electric range > 130 miles)

2%

2%

2%

0%

1%

2%

1-50g/km (electric range 70-129 miles)

5%

5%

5%

3%

4%

5%

1-50g/km (electric range 40-69 miles)

8%

8%

8%

6%

7%

8%

1-50g/km (electric range 30-39 miles)

12%

12%

12%

10%

11%

12%

1-50g/km (electric range <30 miles)

14%

14%

14%

12%

13%

14%

Cars with emissions in excess of 50g/km will have a benefit-in-kind value of 13-37% of the car’s list price when new, from 2020/21.

A company purchasing a brand new vehicle for £30,000, with emissions of over 170g/km would result in a benefit-in-kind charge of £11,100 for the full tax year, in 2020/21 – based on this value, the company would be liable for Class 1A National Insurance of £1,532 (13.8%), and a higher rate taxpayer employee would pay income tax of £4,551 (41%). This compares to the company opting for a brand new fully electric car (0% emissions) for £30,000, on which there would be no benefit-in-kind charge in the 2020/21 tax year, and therefore no income tax or National Insurance to pay - the difference in tax is startling! From 2021/22, the benefit-in-kind for the fully electric car will rise by 1% per year, but it still represents a huge tax saving compared to a high-emission model.

What about the corporation tax angle? The business can claim capital allowances on the cost of the vehicle – for a car with emissions in excess of 130g/km, this would be 6% of the cost of the car in the year of purchase (and 6% per year of the remaining balance thereafter). Keeping with the above example, the company could deduct £1,800 from profits in the year of purchase (being 6% of the £30,000 cost), saving corporation tax at 19% of this amount, however, if the emissions are less than 50g/km, the company can deduct 100% of the £30,000 cost from profits, as ‘first year allowances’ – enhanced capital allowances which can be used for certain energy-saving equipment. The principles of these capital allowances are the same for sole traders and partnerships, however, if there is any private use by the proprietors, the capital allowances claimed are reduced accordingly.

Contact us for details and advice on all aspects of the taxation of business vehicles.

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