Background
Over recent years the increasing tax cost associated with having a company car has made the option less attractive for many individuals and employers. However, with the government keen to encourage the use of low CO2 emission or zero emission vehicles this may again be an option for some employers willing to look at fully electric vehicles.
The government has recently announced that from 6 April 2020 the benefit in kind charge associated with a fully electric car will fall from 16% to 0% of the list price, and the 0% rate will also apply to cars acquired prior to 5 April 2020.
Detail
Prior to 6 April 2015 the taxable benefit on electric cars was nil, but has gradually increased to 16% of list price for the 2019/20 tax year. As electric cars tend to be more expensive than similar-sized petrol or diesel cars, the government is aiming to offset the cost by introducing a 0% benefit in kind (BIK) rate from 6 April 2020. This will apply to fully electric cars.
It is anticipated the BIK rate will increase to 1% for the 2021/22 tax year and to 2% for the 2022/23 tax year.
Although acquiring an electric car prior to 6 April 2020 will mean a BIK taxed at 16% of the list price for 2019/20 (reduced based on availability for the year), the tax rates from 2020/21 onwards still offer a significant reduction in the tax charge for the foreseeable future.
In addition to the reduced BIK rate on a fully electric car there are also other tax benefits available:
- The car will currently qualify for a 100% first year allowance (FYA) for the business purchasing the new vehicle, deductible against trading profits;
- Electricity is not classified as a fuel for car benefit purposes, so the employer can pay for the cost of charging the company-provided electric vehicle with no taxable fuel benefit for the driver;
- An employer can pay the company car driver 4p per business mile, to reimburse them for the cost of the electricity used on business journeys, with no tax implications. With some electric vehicles costing as little as 1p per mile to actually run this represents a good incentive. The 4p per mile rate only applies to company-owned electric vehicles.
The benefit in kind tax rates for hybrid cars are also due to change from 6 April 2020, with the rates reducing from the current level for 2019/20 of 16% of list price for vehicles with emissions of 50g/km or less. The actual rates that will apply from 6 April 2020 on these vehicles will vary from as low as 2% to up to 14% depending upon the electric range of the vehicle, which is effectively the maximum distance the car can be driven in electric mode without recharging the battery.
For those thinking of changing their car in the near future, now maybe the time to consider changing to a fully electric or hybrid car. Whilst the environmental benefits will speak for themselves, the reduced tax costs becoming available may well help to offset the extra costs of the initial acquisition of an electric car.
If you would like more information on the tax rules surrounding electric vehicles or more detail on hybrid cars, please contact our Tax Director, Jenny Marks. To see our other news items please visit our Muras Baker Jones – Blog.