Company Cars: Are They Going To Get More Popular In 2020?

For a long time, company cars were one of the perks of high-salaried jobs and business ownership. A great way to offset some tax and treat yourself to something nice to drive.

Unfortunately, HMRC put a stop to that by taxing the private use of cars firstly based on mileage, more recently on the CO2 emissions of the vehicle. As the manufacturers have reduced the emissions of cars, HMRC have also changed the tax bands to keep tax yields up. Since then, cars have been taxed as a benefit in kind (BIK). When a car has been provided by an employer, to drive for work purposes and this is also used to drive to and from home, for example, this is considered a taxable benefit.

Hence the shift away from company cars towards fuel allowances and redeeming the cost of fuel from HMRC at the maximum rates allowed. Both are more tax efficient and are viewed by many employees - especially sales people who travel for work - and business owners as a financial benefit, albeit not one as generous as company cars before BIK rules came into force.

HMRC-mileage

Putting the Breaks on Petrol

At the same time, the UK - along with China, France and other countries - are moving away from cars that use petrol and diesel. In July 2017, it was announced that fossil fuel cars, vans and lorries will be banned in the UK by 2040, with the British government releasing extra funding to local councils as a matter of urgency to ensure we achieve EU pollution deadlines.

All of this is part of a £3 billion clean air strategy that will include a Clean Air Fund and A new Automated and Electric Vehicles Bill to ensure that service stations on motorways and national petrol stations will include electric charge points. We are likely to see increases in the taxes on petrol and diesel cars, especially older, less fuel efficient vehicles to fund this strategy, whilst HMRC is expected to cut income tax (BIK) rates on electric cars to zero in 2020.

Will this put company cars back in style?

It depends on the way the market moves, especially with the uncertainty Brexit is currently creating. However, with proactive government support and car manufacturers adapting to changing global demand, we could soon expect fleet sales and leasing companies to start promoting electric cars to large corporations and small business owners.

For both, we’ve got the tax benefits to consider. No tax on an electric car, compared to car tax rates that depend on several factors, including the price of the car and fuel efficiency.

Working Out Car Tax Rates

Here is how you work out how much you get taxed when owning a car right now.

  1. Check the value of the car - which needs to be put onto your P11D form (personal tax return); e.g. £15,000. Even if you’ve saved money at the garage, HMRC basis the tax on the true value of the car, with any modifications and new parts.

  2. Multiply this by the CO2 emissions. HMRC has a table that accountants need to consult, or if you are doing your own taxes, it might be worth calling them - or asking the car manufacturer or garage - what BIK band you fall into.

  3. Then, multiply this figure (e.g. 15%) by your personal tax rate, which depends on your income. In the example below, this is based on 20%.

Example calculation:

£15,000 x 15% = £2,250 (BIK amount) x 20% = £450 per year

Even with the millage rates that HMRC uses to offset the cost of petrol and diesel, this tax, plus others associated with having a car as a business owner or employer - giving your staff that benefit - electric cars are starting to look like an attractive alternative in 2020. And after that, they are soon going to become the main way people travel, which should hopefully mean tax benefits continue as we approach 2040.

Disclaimer: We hope you found the information in this article useful and informative. Please remember that this is an article and is no substitute for professional advice on taxes, your business or personal finances.