As a business owner you may be looking at ways to extract funds from your business. Company cars used to be a common method of doing that but over recent years the tax charged has made them unattractive.
But that’s all about to change, that is if you’re happy to get an electric car.
What is a company car, how do they work?
A company car is one owned by a business and provided to an employee for their use.
It is expected that any vehicle given to an employee will have personal use and therefore there is a tax charge (can’t go round just giving people cars to avoid tax can we!). Income tax for the individual and National Insurance for the company.
How is the tax on a company car worked out?
The tax charge is based on the CO2 emissions and the cost price of the car.
At the moment zero emissions cars attract a Benefit in Kind rate of 16%.
This means a car that costs £30,000 has a rate of 16% applied. This gives a taxable value of £4,800.
If you are a basic rate taxpayer (in 2019/20 that’s income under £50,000) the tax is then calculated at 20% of that taxable value.
Therefore, for a year the cost would be £960.
For higher emission vehicles, benefit in kind tax rates can be as high as 37%. So on the same example the tax charge would be £2,220.
The employer then pays National Insurance.
The taxable value is worked out in the same way but the NI rate of 13.8% applied. Therefore a charge of £662.40 (£4,800 x 13.8%) using the original example above.
Do you have to buy the car outright?
No, though there are currently some other tax reliefs available for low emission (under 50g/km) cars if you do buy it.
A low-emissions car may be eligible for 100% first year allowance. What does that mean? Well, the full cost of the vehicle can be used to reduce the profits in your business. For a company, that same £30,000 car would save £5,700 in Corporation Tax.
If you need that cash elsewhere, you can also lease the car and offset the lease payments against your profits.
So what’s changing?
From April 2020 the benefit in kind tax rate is dropping to 0% for fully electric cars.
That means a company car with no tax to pay for the individual or for the employer!
In April 2021 it increases to 1% and in April 2022 it goes up again to 2% but assuming you are a basic rate tax payer (currently income under £50,000), based on a car that costs £30,000, the tax would be as follows:
2020/21 – £0
2021/22 – £60
2022/23 – £120
Add Corporation Tax savings (either on lease costs or buying outright) and the saving is significant.
Pretty attractive, right!
Note: There are changes to the rates on other vehicles too and generally anything with CO2 emissions under 64g/km will see a small saving on the current rates in 2020/21.
What if I need a car now?
You can still benefit from the tax change in April but between now and April 2020 the benefit in kind rate will be 16%.
What are the down sides to an electric company car?
The main concerns around electric cars are practical. At the moment, whilst they have no emissions when driven, the emissions in production are thought to be nearly twice as high as a petrol/diesel model.
The range (how far the go between charges) of electric vehicles is still fairly low and the charging network is still in its infancy. Unless you have perfect weather, no luggage, no lights or radio and drive in your swimwear, it’s pretty much impossible to achieve the advertised ranges!
There are also concerns over resale value given the life of the battery and potential difficulties in replacing them.
That said, in 2020 there are more electric car models being released than ever before and the technology is improving every day. This article tackles some of the more common myths around electric cars.
So what next?
This blog is designed to outline the benefits for tax but there are of course practical concerns. At the moment, however, an electric company car seems a very attractive option.
It’s important to consider all sides and calculate what’s best for you.
If you would like a specific calculation for your business, please get in touch, we’re more than happy to help.