Company cars: Advisory Fuel Rates and changes on the cards for electric vehicles

George Hay Chartered Accountants

For many businesses, company cars are an indispensable element of their overall operation. In addition, they can also be a fantastic incentive for staff to join a company and stay and, as a result, employers are often keen to offer this popular perk.

On the face of it, high cost early on and resulting tax charges can make company cars seem a particularly pricey benefit. However, by embracing developments in technology and giving employees the opportunity to select a cheaper alternative to the typical petrol or diesel, it can prove economical in the long-term.

Put simply, the Benefit in Kind (BiK) tax system penalises owners of vehicles that produce high CO2 emissions by charging them more tax; conversely, it follows that you pay less for a ‘cleaner’ car.

Previously, lower BiK tax rates applied to hybrids, while all-electric electric vehicles were exempt from the charge. However, this is no longer the case with both hybrids and electric vehicles being subject to tax.

How is the tax calculated?

The tax on company cars is calculated as a percentage of the ‘list price’; this being the manufacturer’s valuation of the car when it is brand new. The BiK is then taxed at the employees’ appropriate personal tax rate – typically collected via the PAYE system.

Changes on the cards…

Currently, for the tax year 2018/19, electric cars with zero emissions are subject to tax at 13 per cent; the same percentage as cars with CO2 emissions of 50g/km and below.

The not-so-good news is that, initially, the Government plans to increase the tax charged on these vehicles in 2019/20, to 16 per cent. However, in 2020/21, the rate will be slashed to just 2 per cent for some electric cars, which will make them cheaper again than any other engine type by far.

For those cars with CO2 emissions between 1g/km and 50g/km, for 2020/21 the tax rates will vary between 2 per cent and 14 per cent depending on the number of zero-emission miles the vehicle can travel.

Choosing your company car

When making a decision about which kind of car to use, you should contemplate the practical requirements but also the cost to you as an employee, or to your business if you are the employer.

In general, the tax system tends to favour environmentally friendly options and so it is worth considering electric cars and other low-emission vehicles. While they can be more expensive than petrol and hybrid models to purchase, in the long-term electric cars can be the most tax-efficient to run.

From April 2018, and for the following three years, businesses that purchase new cars which emit less than 75g CO2/km, zero emission goods vehicles, or ULEV recharging or refuelling infrastructure, are eligible for Enhanced Capital Allowances (ECAs). This provides for 100 per cent First Year Allowance (FYA), in the year of purchase.

The changes will also bring sharp reduction, for employers, in their National Insurance contributions on electric vehicles. An employer’s liability is based on the taxable value of the Benefit in Kind so, as the taxable benefit reduces, the employers NIC charges will also reduce.

Finally, vehicle excise duties (VED) start at zero for zero emission cars, and the VED rates for low emission vehicles are much lower than petrol/diesel equivalents.

Advisory Fuel Rates from 1 March 2019

Whilst on the topic of company cars, the new Advisory Fuel Rates (AFR) have been published, effective 1 March 2019.

The rates apply where a business is reimbursing employees for travel in a company car, or where employees must repay the cost of fuel used when travelling in a company car in a personal capacity.

If an employer uses these rates, HM Revenue & Customs (HMRC) will automatically recognise that there is no taxable profit or Class 1A National Insurance due.

There is a separate electricity rate for fully electric cars that is subject to different rules. The electricity rate for fully electric cars is 4p per mile.

The rules treat hybrid cars as either petrol or diesel.

AFR effective 1 March:

Engine size Petrol amount per mile LPG amount per mile
1400cc or less 11p 7p
1401cc to 2000cc 14p 8p
Over 2000cc 21p 13p
Engine size Diesel amount per mile
1600cc or less 10p
1601cc to 2000cc 11p
Over 2000cc 13p

The rates will next be updated on 1 June 2019.

To speak to one of the team about the upcoming changes to company car tax, and how you or your business can benefit, contact us on 01767 315010.