Company car tax for employees – how going electric can reduce the tax they pay

Company car tax for employees – how going electric can reduce the tax they pay

 

For as long as any of us can seem to remember, the company car has been under fire from both the government and HMRC. If you’ve ever sat down and worked out the tax you and your company would pay for having one, the figure you arrived at was probably enough to put you off your dinner.

But could the green revolution be changing all of that. There are lots of different factors that contribute to calculating how much tax you need to pay on a company car.

In this article, SMART Team explains what company car tax is, how to calculate it, and whether or not you would be better off going green.

 

What is the company car tax?

Company cars are classed as a benefit in kind. This means that because your employees gain personally from having one (i.e. their own private usage), company cars are taxed.

HMRC’s position is that you need to pay tax on a company car if you use it for any reason that is outside of work – this even includes commuting. The amount of tax that you pay is based on how much the car is worth and the level of emissions that it produces.

The first step to working out how much tax you will need to pay is by working out the “P11D value” of the car.

 

What is a car’s P11D value?

First, what is a P11D? It’s a form declaring both expenses and benefits incurred by an employee or Director.

A company car is a benefit and it must be declared. You need to include the “P11D value” of the vehicle on the P11D form. This value is the price of the car minus the non-taxable parts such as road tax and your initial registration fee. The manufacturer sets this value and manufacturers normally state the P11D value in the car’s manual.

 

How to calculate company car tax

There are two ways that you can work out your company car tax liability. You can either:

  • Use HMRC’s online tool, or,
  • Work it out manually.

For HMRC’s online tool, click here. Here is how you can calculate the cost manually:

  • First, find out your car’s P11D value.
  • Then, multiply the car’s P11D value by the car’s company tax rate (see the table below). The company car tax rate is based on the CO2 emissions that the car produces).
  • Last, multiply the company car tax rate by the employee’s personal tax rate.

Let’s say that you were an employee in the basic rate tax band (earning less than £46,350). Your company car was a petrol fuelled car worth £15,000 with a CO2 emission of 150g/Km.

This would mean that the tax you personally pay on your company car would be £15,000 × 0.31 × 0.20 = £930.00

Here are all 21 company car tax bands based around Co2 emissions:

CO2 (g/km) Petrol rate (%) Diesel rate (%)
0-50 13 17
51-75 16 20
76-94 19 23
95-99 20 24
100-104 21 25
105-109 22 26
110-114 23 27
115-119 24 28
120-124 25 29
125-129 26 30
130-134 27 31
135-139 28 32
140-144 29 33
145-149 30 34
150-154 31 35
155-159 32 36
160-164 33 37
165-169 34 38
170-174 35 39
175-179 36 40
180+ 37 41

 

As you can see, cars with lower emissions incur less tax. This means that, by choosing electric and hybrid cars as company cars for your employees, this often results in a much lower personal tax liability for staff than gas-guzzling alternatives.

 

The benefits of going electric

The government are heavily incentivising people to make the switch to electric cars. By 2020-21, the benefit in kind rate for electric cars will be as low as 2%. An additional 100% of relief will be given to any businesses which purchases an electric car – very generous compared to the current regime.

There are recharging points popping up across the country and, for our clients who work a lot of their time in London, electric cars do not attract congestion fees.

 

The downsides of going electric

Electric cars are expensive. This high initial cost will almost certainly be enough to put off many prospective business owners. In times, given the government’s drive to make obsolete the internal combustion engine, prices will come down substantially. Unfortunately, we can’t tell you how fast those prices will fall or when the real price drops will begin to happen.

 

Talk to SMART team today

Company car tax is complicated. If you want a car for yourself, is it smarter to lease or purchase a car in your own name or in your company’s name? Call us today on 01202 577 500 or email us at info@yoursmartteam.co.uk for advice and support bespoke to you and your situation.

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