If you’re a contractor who is thinking of purchasing an environmentally friendly company car through your limited company, due to the car benefit changes, you may be better off waiting until 2020 to do it.
Tax on company cars
Instead of using their personal car and reclaiming the mileage allowance relief, some contractors choose to purchase a car through their limited company. HMRC considers the private use of company cars as a Benefit in Kind (or BiK as it’s also referred to).
The value of the Benefit in Kind or BiK cash value as it’s also known is used to calculate how much Income Tax as an employee you must pay and also how much Employers National Insurance Contributions you have to make to HMRC.
How is it calculated?
Several variables are taken into consideration when calculating the Benefit in Kind on a company car, these include:
- Manufacturers list price
- Type of fuel the vehicle uses
- Carbon dioxide emissions
These factors are used to calculate the BiK percentage which HMRC publishes each year. Currently, the maximum BiK is 37% of the vehicle price. As the government is trying to encourage people to be as ‘green’ as possible, it offers a reduced BiK for electric and low emission vehicles. For the 2019/20 tax year, it is 16%.
Comparison of BiK cash value using a petrol and low emission vehicle as an example:
|Vehicle||Manufacturer’s List Price||CO2 (g/km)||BIK %||Benefit Cash Value||Employers NIC – 13.8%||Employees Income Tax – 20%|
|Kia Sportage (petrol)||£27585||128||29%||£7999.65||£1103.40||£1599.13|
|Nissan Leaf (electric)||£31,440||0||16%||£5030.40||£694.19||£1006.08|
Changes from 2020
With the growing environmental crisis and health concerns that are being caused by vehicle emissions, from 2020, the BiK percentage for ultra-low emission vehicles and vehicles with a CO2 emission below 50g/km drops from 16% to 2%.
Taking the example above, from 2020 the Employers NIC due on a Nissan Leaf will be £86.77 and the Employees Income Tax will be £125.76. This is a significant saving.
So, if you’re looking for a ‘green car’, here is a list of vehicles with the lowest CO2 emissions:
|BMW i3||13 g/km|
|Toyota Prius – plugin hybrid||28 g/km|
|Jaguar I-Pace||0 g/km|
|VW Passat GTE||40 g/km|
|Nissan Leaf||0 g/km|
|Volvo XC60 T8||47 g/km|
|Tesla Model S||0 g/km|
|Mitsubishi Outlander PHEV||40 g/km|
|Hyundai Ioniq||84 g/km|
The Treasury has also made recent proposals for a driver wanting an emissions-free electric vehicle to pay 0% benefit-in-kind. This is part of new efforts to encourage drivers to go green! The rate will rise to 1% from April 2021 and back up to 2% from April 2022.
Before you rush off to the car-forecourt, there are some things to consider when purchasing a company car through your limited company:
- You can only reclaim VAT on the car if it is used exclusively for business
- If you plan to use the car to travel to and from your regular place of work, this is classed as ‘ordinary commuting’ and you won’t be able to reclaim VAT
- When a limited company buys a car it isn’t treated as an expense that can be deducted from your profit. Instead, tax relief is obtained through Capital Allowances which are calculated based on the CO2 emission of the car. Further details can be found on the .gov website
- If your limited company pays for private fuel costs, HMRC will deem you’ve received a cash benefit based on the CO2 emission of the car
- If the business only pays for business fuel costs, there’s no cash benefit and no additional tax is due. However, you will need to keep accurate mileage records to prove to HMRC that only the cost of the business fuel was reimbursed
For further information on the car benefit changes, or for advice on purchasing a company car through your limited company, speak to one of our Directors on 01962 867550, or send us a message through our website.