19 December 2017
As all motorists will know, the Government has changed its mind on the desirability of diesel cars. Although these are more efficient and emit fewer greenhouse gases than petrol vehicles they are accused of causing more local pollution that endangers the health of the public. In the longer term electric cars may be the answer; in the meantime the Government is encouraging their development and use by altering the benefit-in-kind rates on company cars. The tax payable on the benefit of having the use of a company car is the list price of the car multiplied by a percentage based on its emissions, multiplied by the individual’s tax rate.
Automotive manufacturers – incentivisation
Benefit-in-kind rates have, for many years, been a spur for developments in the automotive industry. When the rates were based on engine capacity they became a motive for squeezing more power out of smaller engines. When one of the tax thresholds was set at 1,600cc many cars were designed with engines of 1,599cc. Now they are based on CO2 emissions, manufacturers endeavour to maximise output whilst minimising emissions. So, no doubt the latest benefit rates, set for the next three tax years, will continue to incentivise manufacturers to improve electric vehicles.
Electric vehicles: overcoming the disadvantages
The main disadvantages of electric vehicles are their restricted range and high initial cost. The other disadvantage, the lack of charging points, is rapidly being overcome by the installation of the required infrastructure around the country. Typically an electric car will cost £5,000 more than its internal combustion engine equivalent. Range between charges is improving with better battery technology. The new Nissan Leaf for example, is claimed to cover up to 155 miles before needing to be recharged. The phrase ‘up to’ is significant. In real driving conditions, especially in hilly country or cold weather, the range is reported to be less than 100 miles.
How about hybrids?
The intermediate stages between internal combustion and pure electric are hybrid and plug-in hybrid. By 2020/21 the benefit-in-kind rates will recognise the most efficient of these. Those cars whose official CO2 emissions are less than 75 g/km will be allocated a percentage based on their range when used as a pure electric vehicle. Realistically this is only going to apply to plug-in hybrids. The tax treatment of zero-emission vehicles will be much more generous from 2020/21 onwards. Next year these will be taxed on the list-price multiplied by 13%. This rises to 16% in 2019/20, then falls to 2% the following year. (It might also be worth pointing out that if your employer provides you with fuel for private use, you are liable to tax on this, but not if the vehicle is purely electric.)
If you are offered a company car, and one of the options is an electric or hybrid vehicle, you will probably not be too concerned about the relatively higher list price, although this will be reflected in the amount of tax you pay. The question is whether the price premium is more than cancelled out by the lower emission-based percentage in calculating the taxable benefit.
Tax rates for electric cars
Assuming that you are prepared to accept the downsides of an electric car, you need to know how the tax you pay will be affected by your choice. There are few purely electric vehicles available, so for the purposes of comparison we have chosen the Nissan Leaf Acenta 30 KwH, whose list price is £25,970. A conventionally-powered car of similar size and specification is the Toyota Auris, which usefully comes in three versions; diesel, petrol and hybrid. We have assumed an annual mileage of 10,000 and used current supermarket petrol station prices, on the basis that the employer will not be providing fuel for private use. We have also assumed that both the claimed range for the Nissan and the official consumption rates for the Toyota differ from real life usage by 20%. We have used a tax rate of 40%. The results of the comparison of these four vehicles is shown in the table below:
The savings in tax and fuel costs of running the electric car are obvious. The total cost for a higher rate taxpayer in 2018/19 (fuel + tax on benefit-in-kind) is £1,635[i]. The cost of the hybrid is £2,595. It is interesting that the hybrid costs only slightly less than the petrol (£2,947) and the diesel (£3,119). By 2020/21 the differences are marked: the cost is £500 for the electric vehicle compared to the hybrid (£2,145) and the diesel (£3,460). In fact over the next three tax years the rates for all cars with emissions exceeding 95 g/km will increase by three or four percentage points and the diesel supplement will rise from 3% to 4% for the most polluting diesels, further emphasising the tax benefits of zero-emission cars. We suspect, however, that unless huge strides have been made in range and charging times by 2020/21, despite the tax savings, this option will only appeal to those who predominantly do short urban trips.
If you need a more detailed list of emission-based percentages go to our latest budget summary. If you would like us to review your company car policy for tax or cost effectiveness, please contact me or fill in our contact form here.
For further information about this topic, please speak to one of our accountants in Newcastle, Jarrow or Sunderland.
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