Over recent months there have been a number of articles in the news about the merits of providing employees with electric cars. This is largely down to significant tax changes which are expected to take effect from 6 April 2020.
When an employee is provided with a car by their employer which they are permitted to use privately, then the employee is taxed on the value of benefit in kind for that private use. The benefit in kind is calculated as a percentage of the price of the vehicle, with the appropriate percentage based on the car’s CO2 emissions. Pure electric cars – which have zero emissions – are able to benefit from the lowest rate, which for 2019/20 is 16%.
From 6 April 2020, assuming that measures announced last year are included in this year’s Finance Bill due to be published in March, the relevant percentage for the benefit in kind charge will be reduced to 0% for 2020/21 for the following cars:
- Pure-electric cars – whether registered before or after 6 April 2020.
- Hybrid vehicles registered from 6 April 2020 which have CO2 emissions of 50g/km or less and can travel 130 miles or more on a single electric charge.
The measure will effectively result in no benefit in kind tax charge for the employee – reducing their income tax bill and saving the employer Class 1A national insurance. This 0% benefit rate will only apply for one year, but rates will remain low for the following two years at 1% for 2021/22 and 2% for 2022/23.
Combined with the fact that, for capital allowances purposes, new cars with emissions of 50g/km or less are eligible for 100% first year allowances - meaning potentially that the full cost of the car can be written off against tax in the year of purchase – the changes to the benefit in kind position mean that pure-electric and very low emission company cars start to look very attractive from a tax point of view. Furthermore, employees can also benefit from tax-free charging at their workplace.
If a pure-electric car is not, for whatever reason, a practical option, then there is still some good news for hybrid cars with electric and petrol/diesel engines with CO2 emissions of less than 75g/km as the benefit in kind charges for these vehicles will also be reduced with the introduction of a new series of rates.
For hybrid cars with CO2 emissions up to 50g/km which are first registered on or after 6 April 2020, the rate for 2020/21 rises from 0% where the car has an electric range of 130 or more miles to 12% where the electric range is less than 30 miles. For the same cars registered before 6 April 2020, the 2020/21 rate rises from 2% if the electric range is 130 or more miles to 14% if that range is less than 30 miles.
For hybrid (or any other) cars with CO2 emissions between 51g/km to 74g/km, the rates depend on the emission figure and not the electric range. For 2020/21, the rate for these cars is between 13% and 17% for first registrations on or after 6 April 2020 and between 15% and 19% for registrations before 6 April 2020.
For all cars with CO2 emissions of 75g/km or more, the rates will continue to scale with emissions up to 37% - and for some cars registered after 6 April 2020 it is likely that the BIK charge will increase because new, stricter standards will be used to measure their CO2 emissions.
Perhaps surprisingly, the benefit in kind for vans is expected to increase in the coming years as the current discount is reduced.
Unlike cars, van benefit is only charged where the employee has significant private use. (For a car even the most insignificant private use can trigger a benefit in kind charge.) Van benefit is also set at a fixed amount (£3,430 for 2019/20) which is independent of the van’s emissions or cost.
For zero-emission vans, like electric vans, this fixed charge is reduced. For 2019/20, zero-emission vans receive a 40% discount from standard van benefit in kind. However, over the next few years the percentage discount will be reduced so that by 2022/23, the benefit in kind for zero-emission vans will be the same rate as for all other vans.