The COVID-19 Pandemic has seen humanity’s environmental impact much reduced by Covid-19. If you are considering changing to a more environmentally friendly vehicle, the added tax benefit might well sway your decision.
We have considered the comparative tax advantages of buying or leasing a company car in an earlier blog https://src-time.co.uk/is-it-better-to-buy-or-lease-a-car-for-your-small-or-mid-sized-business/and will not consider these in any great detail here. In this piece we look at the tax penalties associated with high emission cars and the tax advantages of ultralow/zero emission cars.
High Emission Cars
The government is keen to nudge road users in the direction of greener vehicles. After 1 April 2018 the definition of a high emission vehicle was expanded to one with CO2 emissions exceeding 110g/km. The previous limit was 130g/km and not long before that was 160g/km.
Income Tax and Corporation Tax relief is restricted for the leasing costs of high emission cars. There is a fixed 15% disallowable element to the lease charge.
The restriction does not apply to situations:
i. where the car is only available to the taxpayer for a period of no more than 45 days, or
ii. the leasing of motor cycles.
The restriction only applies to the leasing costs of high emission cars. Any maintenance costs incurred in relation to leased cars are allowable in full regardless of the CO2 emissions of the car.
Tariq leases an Audi car under a finance lease which started on 1 July 2019 for use by an employee. The amounts he pays are:
Finance lease interest £1,500
Finance lease depreciation £2,100
Total payment £3,600
The Audi has CO2 emissions of 150g/km, so his lease is subject to the restriction:
Allowable for income tax: £3,600 × 85% (£3,060)
Non-deductible expense £540
There is no adjustment for the private usage of the car by Tariq’s employee, since the employee will be charged to income tax on an employment income benefit.
Zero and Low-Emission Cars
On a leased zero or low-emission car the full amount of the lease payments is tax deductible.
A purchased low-emission car can attract an attractive tax allowance in the 2020/21 tax year.
Until 1 April 2021 (for Corporation Tax) or 5 April 2021 (for Income Tax) a low or zero emission car can qualify for a 100% first year allowance (FYA) if its CO2 emissions do not exceed 50g/km and the car is purchased new and unused. This means that the entire purchase cost can be offset against income of this tax year.
By contrast, cars with CO2 emissions of between 51g/km and 110g/km are added to the main plant and machinery pool for capital allowance purposes, so they attract an annual writing down allowance (WDA) of 18%. Cars with CO2 emissions exceeding 110g/km must be allocated to the special rate pool, where the WDA is only 6% per annum.
Other interesting points in relation to electric cars
Electric charging charges
Where the employer pays for the cost of charging the company-provided electric vehicle there is no taxable fuel benefit for the driver, as electricity is not classified as a fuel for the car benefit regulations.
Where the driver of the electric vehicle pays for the electricity to power it, either from their domestic supply or by charging at a roadside station, the employer may reimburse the employee for that cost.
When charging from a domestic supply the employer can pay the company car driver 4p per mile, to reimburse them for the cost of the electricity used for business journeys, with no tax implications. This rate only applies to company-owned electric cars, not to private vehicles.
Where the employee uses his or her own electric car for business journeys the company can pay the normal tax-free mileage allowance to the individual of 45p per mile for the first 10,000 miles driven in the year, with additional business miles reimbursed at 25p per mile. The driver may also claim the passenger rate of 5p per mile for every person he or she takes on the same business journey.
Where the company allows employees to charge their own electric vehicles at the workplace, there is no taxable benefit for the provision of that free electricity.
For this tax exemption to apply, the charging facilities must be provided at or near the workplace, which is the same requirement that applies to tax-free workplace parking. This tax exemption does not apply if the employer reimburses the costs of charging the employee’s own vehicle away from the workplace, such as at a motorway service station.
In common with other workplace tax exemptions, the vehicle charging facilities must be available to employees generally. If there are multiple sites, the employer does not have to provide an electric vehicle charging point at each of them.
Surprisingly the employee does not need to be the driver of the electric vehicle to benefit from the exemption; he or she may be a passenger, perhaps where the spouse or partner has driven the car to work.
Where the business installs charging points for electric vehicles in the period up to 31 March 2023 (Corporation Tax) or 5 April 2023 for Income Tax, it can claim a 100% FYA for those costs
Vehicle Excise Duty (Car Tax) Rates
If you have bought a car registered on or after 1 April 2020, you will pay a rate based on the vehicles CO2 emissions. If the car doesn’t meet the Real Driving Emissions 2 (RDE2) standard you will have to pay a higher rate.
Cars registered on or after 1 April 2020. This payment covers the vehicle for 12 months.
|CO2 emissions (g/km)||Diesel cars (TC49) that meet the RDE2 standard and petrol cars (TC48)||All other diesel cars (TC49)||Alternative fuel cars (TC59)|
|1 – 50||£10||£25||£0|
|51 – 75||£25||£110||£15|
|76 – 90||£110||£135||£100|
|91 – 100||£135||£155||£125|
|101 – 110||£155||£175||£145|
|111 – 130||£175||£215||£165|
|131 – 150||£215||£540||£205|
|151 – 170||£540||£870||£530|
|171 – 190||£870||£1,305||£860|
|191 – 225||£1,305||£1,850||£1,295|
|226 – 255||£1,850||£2,175||£1,840|
Annual renewal for cars registered on or after 1 April 2020 (these figures may be revised before 2021)
|Fuel type||Single 12 month payment|
|Petrol or diesel||£150|
Vehicles with a list price of more than £40,000 – surcharge
You have to pay an extra £325 a year for 5 years after the first year if you have a car with a ‘list price’ (the published price before any discounts) of more than £40,000 (excluding zero emission vehicles).
SRC-Time are one of the South East’s leading accountancy firms in advising individuals and businesses in all aspects of their accounting and tax affairs and we are able to assist in any issue raised above.
Our expert team is available to provide you with advice and can be contacted on 01273 326 556 or you can drop us an email at firstname.lastname@example.org or speak with an account manager to get any process started.