18th February 2020
The 2020/21 tax year brings exciting news for those looking into purchasing a company car, but how much tax do you as an employee need to pay after receiving this benefit and why? Also, can you, as a limited company contractor benefit from using a company car? We will explore these questions and answer them in this guide.
Is it true that fully electric cars will be tax-free in 2020/21?
Yes says Mr Musk (owner of Tesla Motors) who will rub his hands together in excitement. If you ever wanted one, now is the time to get it (other electric cars are available)! Electric vehicles will go from 16% BIK tax rate in 2019/20 to 0% 2020/21!
There will be two separate, but entirely new BIK tables for 2020/21, one for those driving a car registered after 6th April 2020, and one for those that drive a vehicle registered before that date.
Electric vehicles registered after the 6th April will fall into the 0% BIK rate, increasing to 1% in 2021/22 and 2% in 2020/23.
The 0% rate will also cover electric vehicles registered before the 6th April 2020 plus hybrids that emit less than 50g/km CO2 and have an electric range of at least 130 miles.
What is the company car tax?
If you are driving a car provided by your employer and it is available for you to use outside work, it is viewed as a taxable benefit. HMRC attaches a monetary value to the private use of the vehicle and collects tax on it; this is what we know officially as Benefit in Kind (BIK) tax.
How does it get calculated?
This will look complicated but bear with us.
Calculation of the tax is based on CO2 emissions of the specific car provided, which was the Government’s way of encouraging companies to purchase more environmentally-friendly vehicles.
This sounds simple enough, but that’s not the end of it. There are other (just a few) factors that also affect the amount you pay:
- The list price (P11D value) of the car before non-taxable items (e.g. road tax) and after optional extras
- The tax rate you are in (20%, 40% or 45%) based on your annual income
- The type of fuel the car runs on
The easiest way to work out the tax you pay is by using HMRC’s own car tax calculator, which will ask for all of the above details, plus any tax-reducing facts like your contribution to the initial cost of the vehicle and the percentage of use.
Here is a calculation example in three steps:
- Determine the car’s list price (P11D value) – let’s take a Mercedes C Class 220 d Sport with a list price of £38,460
- Multiply this value by the company car tax rate – based on its CO2 emissions figure of 114 g/km our car falls in the 27% bracket, so list price x 27 = £13,894.20, which is the BIK value
- Multiply the BIK value by your personal tax rate of either 20, 40 or 45% to get the amount payable. If you are a higher rate taxpayer, this will be £13,894 x 40% = £5,557.68
To summarise it:
|List Price||Car Tax Rate||Personal Tax Band||BIK Tax to Pay|
Petrol vs Diesel
The tax bill on diesel cars will typically be more expensive (there is four per cent surcharge) as they pollute more than their petrol counterparts. When you look at cars, keep this in mind and see if you cover enough miles to recover the additional cost in fuel savings over a petrol engine car.
What about hybrid cars?
Because of their lower CO2 emissions, hybrid cars make a great alternative or a stop-gap between buying fossil fuel-powered cars and fully electric ones. These vehicles will fall into a lower car tax band.
For example, a hybrid version of the above C Class Mercedes will fall into a 14% car tax rate versus 27% for the diesel; however, it might be more expensive to purchase.
So should you replace your fossil fuel burning car then?
If your company can afford it, we think yes. You will be kinder to the environment, and you won’t have to worry about the running cost (even if they are a lot lower for an electric car). It’s a win-win really.
Remember, however, that the owner of the car will be the company, so if you decide to close down your business it will either have to be sold or bought by yourself if you wanted to keep it. We recommend talking to your accountant before making a decision.