Company car tax rates are changing. Do you stand to benefit?
Choosing a greener company car option has meant that many companies and company car drivers have enjoyed the tax relief incentives that come with choosing an eco-friendly vehicle. But company car tax rates are changing. And employees who pay benefit in kind (BIK) plus a supplement on a company car could end up paying a lower tax rate under the new system.
Company car tax rates have been determined by an emission-based system since April 2002. This system has meant that that the amount of BIK tax payable is based on the value of the car and its CO2 emission output. The higher the emission output, the higher the rate of tax.
From April 2020, the government will be switching the system by which it measures the emissions from vehicles, moving away from the New European Driving Cycle (NEDC) to the Worldwide Harmonised Light Vehicle Test Procedure (WLTP) and Real Driving Emissions Test (RDE2).
To accommodate the changes there will be a period of time to allow for the changeover to the new system. During this time, two BIK rates will be used. One for vehicles registered before 6th April 2020 and one for vehicles registered after 6th April 2020.
How Does Company Car BIK Tax Work Currently?
Company car tax, payable by the employee, is calculated by multiplying the vehicle’s value (P11D) by the BIK rate and the employee’s income tax rate.
At the moment, diesel company car drivers pay an additional supplement on top of the current BIK rate of 22% for petrol and RDE2 complaint vehicles. Because diesel engines produce higher volumes of CO2 emissions, they are often non-RDE2 compliant and therefore liable for higher tax bands because of their impact on the environment.
The current supplement sees diesel drivers paying an extra 4% in tax compared to drivers with a petrol version of the same make and model. And, for every additional CO2 tax band that is exceeded, an extra 1% increase is added, reaching a maximum of 37% in tax payments.
The current NEDC system is considered an outdated method for determining the emission output, and the introduction of the WLTP will mean company cars will be measured under new criteria and tax payments will need to be reviewed.
What will BIK Payments Look like from April 2020?
With evolving technologies and a push for greener road vehicles, newer car engines are producing significantly lower emissions than their older counterparts. And, many modern diesel engines consistently meet the requirements of the WLTP and RDE2, often with emission values well below the set threshold.
Under the new criteria, newer diesel engines that meet the RDE2 standards will be exempt from the 4% BIK supplement. Vehicles that have achieved RDE2 certification include the Mercedes A & B Class models, the Jaguar XE & XF, the Range River Evoque D150, and the BMW 1 Series & X1.
Going electric; the way forward for fuel, environment and tax efficiency?
For company cars with even lower emissions, like hybrid vehicles and electric cars, there will be further cuts to the amount of tax payable. Hybrid drivers will see a reduction of 2% on their current BIK rate, and electric vehicles will fall from 16% in 2019/20 to 0% in the 2020/21 financial year. This rate will then increase slightly to 1% in 2021/22 and 2% in 2022/23.
If you would like to find out how the proposed changes to company car tax rates will affect your business or would like to learn more about how your employees could make savings on benefit in kind tax payments, then get in touch with our Corporate & Personal Tax team in Warrington on 01925 830 830 or call our Manchester office on 0161 905 1801.