If you’ve been thinking about switching your company car to an electric vehicle, the forthcoming change to the tax rate might just make up your mind. From next April, drivers will pay 0% company car tax on electric vehicles, as part of new efforts to encourage the switch to greener models.
Zero Benefit In Kind (BIK) tax from April 2020
Company car vehicles currently account for almost 6 in every 10 new car registrations and the government is keen to shift more drivers towards fully electric models.
Their commitment to doing this is clear as, from 1 April 2020, company car drivers who choose an emissions-free electric fleet model will pay no benefit-in-kind (BIK) tax at all for the year. The rate will rise to 1% in 2021 and 2% in 2022 but rates beyond this timescale are still under review.
The forthcoming changes have been described as a “milestone moment” as this is the first time company car drivers will not have to pay any tax.
The changes follow a review into the impact of Worldwide harmonised Light vehicles Test Procedure (WLTP) on Vehicle Excise Duty and company car tax. (https://www.gov.uk/government/publications/review-of-wltp-and-vehicle-taxes)
How company car tax is calculated
The amount of company car tax an employee will pay is based on the vehicle’s official value (or P11D value) multiplied by the appropriate BIK rate. The BIK rate is determined by the car’s CO2 emissions and fuel type, and the employee’s income tax rate.
CO2 outputs are due to rise as a result of the WLTP measurements and diesel cars are already subject to higher rates than equivalent petrol models. In light of this, the Government is taking decisive action to incentivise more drivers to choose electric cars.
With regard to future rates, the guidance is that percentages will be announced at least two years in advance to provide certainty for employers, employees and fleet operators.
Those willing to go greener can look to make significant savings, especially if they already pay the higher rate of tax. As an example, the latest 2.0-litre diesel BMW 3 Series (priced from £32,000) which emits 110 to 115g/km CO2 will be subject to 31% BIK from April next year. A lower rate (20%) tax payer would have to pay £2,000 a year in BIK to drive this car. Those in the higher 40% bracket would have to pay £4,000 between April 2020 and March 2021. So the £0 you would pay for choosing electric represents a huge amount back in your pocket.
The types of vehicles covered by the 0% rate in 2020 include pure or battery electric cars as well as plug-in hybrid cars.
To qualify, plug-in hybrid models will need to emit less than 50 grams of CO2 per kilometre and be able to travel for at least 130 miles as a pure electric vehicle. There is one slight problem with this , however, as there are currently no hybrid vehicles that meet these limits. Fortunately, there will be tax breaks for hybrid models with shorter electric-only ranges – though they are not quite so generous.