Electric vehicles: are company cars becoming a viable perk again?

17 January 2020
Photo by Andrew Roberts on Unsplash

Company cars used to be a great way to attract and reward employees, treat yourself, and at the same time make a good first impression when turning up to meetings or events.

However, the halcyon days of company cars have largely come and gone thanks to the ever-increasing ‘company car’ tax. Most employees and business owners now prefer to purchase or lease their own vehicles and claim the mileage back from the company instead.

But all that could be about to change. And it’s all thanks to the government’s new tax breaks for company electric vehicles:

From April this year, employees who choose a new electrical vehicle with zero CO2 emissions will pay NO tax on the ‘benefit in kind’ (BIK) – absolutely nothing – for the next twelve months, and then pay very little thereafter.

Interested? You should be. This is a game-changer that could save you money and put company cars back on the map.

The problem with unkind BIK

Company cars often create more tax liability than they save. The employee must pay tax on the ‘benefit’- the amount owed each year depending on the list price of the vehicle and any extras (not simply the lease payments made), its CO2 emissions, plus the employee’s tax band. In addition, the employer also pays National Insurance on this benefit.

Because of the high tax cost, only small engined vehicles are cost-effective options these days. Most employees therefore chose to opt out. Small diesel run-arounds have their uses but they don’t exactly get owners, directors, and executives excited.

So what is the government doing?

Because companies purchase a significant proportion of all new cars sold, it was essential for the government to act. And act they have. What’s more, they’ve managed to create some alignment between their environmental and fiscal policies at the same time.

This move to dramatically reduce taxes on electric vehicles is very astute. It should breathe new life into the company car market and also stimulate moves towards a zero-carbon society.

The government has also introduced modest incentives for plug-in hybrid electric vehicles.

How much could you save?

Employees driving zero-emission cars will pay 0% on the BIK in 2020-21, just 1% in 2021-22, and just 2% in 2022-23. There are also excellent savings for lower-emission hybrid vehicles if you register the vehicle after April this year.

The formula is simple: the less CO2 the car emits, the lower the proportion of its value you are taxed on. So driving a real gas-guzzler will cost you a whopping 37% of its list price for each of the next three years – in other words, you’ll be taxed on 111% of the car’s cost over that period.

These savings become obvious when you apply them to some real scenarios. A £45k all-electric Tesla Model 3 for example, would be taxed based on an annual value of £900, so for a higher rate taxpayer the annual tax cost would be just £360 by 2022/23. For an equivalent cost diesel Mercedes, you’d be looking at being taxed on an annual value of over £15k meaning, for a higher rate taxpayer, the annual tax cost would be over £6k by 2022/23. And of course the Tesla would be much quicker!

Make the right decision

Although you’ll certainly benefit from choosing an electrical vehicle, it’s important not to rush into any purchase. You first need to consider (a) the most economical model for you, and (b) the right method of purchase.

There are a few options you’ll need to consider here. Do you buy the car outright, opt for a personal contract purchase (like the old hire purchase arrangements), or lease vehicles through your business?

You should also consider how quickly an electric car might depreciate in value. Technology moves quickly, and the resale market is just in its infancy, so it’s not yet clear how much of their value these cars will hold on to.

Some basic advice …

If you’re looking to get a low-tax company car, you should only be looking at those with an electric engine – ideally a fully-electric zero-emission car, or a hybrid with minimal emissions and an electric range of over 130 miles.

Hybrids with lower electric ranges, whilst marketed as clean, environmentally-friendly options, do have some benefits but the BIK values are higher.

Our general advice for petrol/diesel vehicles is that you’re almost certainly better off buying privately.

Secondly, it may be more cost-effective to lease the car, as you may be able to claim back 50% of the VAT on the lease payments. If you buy outright, no VAT can be recovered other than in very specific circumstances.

You’ll also need to work out precisely how much tax will be owed by an individual on different vehicles, taking into account the list price, costs of extras, CO2 emissions, income tax rate and how long they might have it for. This isn’t a simple equation.

Talk to an expert

Because these are complex issues it’s best to talk to us first before trading in your old fossil fuel burning car for an electrically powered one. We will ensure that you have all the facts, figures, and other relevant information at hand to help you make an informed decision – one that’s right for you.

Electric company cars are a fantastic way to save the planet. But we’ll make sure you save as much money as possible too.

Tony Burgoyne

Phone us on 01892 891902 or contact us to talk about your financial plans