The changes came into effect in April 2017 amid an array of headlines such as ‘The Company Car is Dead’ ‘HMRC Take Aim at Company Car Drivers’ and ‘Death of Salary Sacrifice ‘. All made it unclear whether a company car is still the benefit we thought it was. What do the new tax changes mean in terms of company cars? As employers would a company car be a perk for our employees or a financial burden?
Many employers will use a company car as a way of rewarding and retaining top performing members of staff and to ensure those who are expected to travel a lot in their job role have their needs met. Companies will usually choose car leasing to provide their staff with a brand-new vehicle. There are 3 main ways an employee could fund a car, 2 of these are affected by the new tax rules.
1. Company Car with No Cash Alternative or Salary Sacrifice – NOT AFFECTED
The tax rules surrounding providing a company car without any cash alternative or salary sacrifice are still the same, these are unaffected by the tax changes which came into place in April 2017.
An employee who has a company car in this way will pay company car tax which is calculated using 3 values:
- P11d value of the vehicle
- Benefit in Kind rate (BIK)
- Personal tax rate
Although this way of having a company car is unaffected by the tax changes which took effect in April, it is affected by changes in the Benefit in Kind Rate. The BIK for cars is calculated based on the emissions the car produces and the rates can change on a yearly basis. The Government is keen to encourage the use of ultra-low emissions vehicles (ULEV), and so the lowest BIK rates are for these vehicles. Each year the rates are increased. For example, this year a Ford Fiesta with emissions of 82g/km of Co2 is subject to a 17% BIK rates. In the tax year this will increase to 22%, increasing the amount of company car tax payable for the same car. Companies would be wise to consider environmentally friendly ULEV’s as car options to keep company car tax payments low for their employees as the rates increase.
2. Choice Between a Company Car or a Cash Alternative – NOT AFFECTED
Employers may offer this choice so staff can choose to take the cash equivalent and fund a vehicle themselves, rather than have a company car with the restrictions on car choice this may entail. For the company, providing an employee with the cash alternative rewards the employee, while releasing the employer from the maintenance responsibilities of a company vehicle.
Funding a car in this way has been affected by the tax laws introduced in April.
Before the changes, the employee would be charged the benefit in kind value of the car if taken. From April 6th onwards an employee funding a car in this way will pay tax on the value of the cash alternative or the benefit in kind rate whichever works out to be the highest amount. This means those who have previously chosen a vehicle with a low P11d value and low Co2 emissions may no longer experience any benefit from a reduced tax bill as they will be taxed on the full amount of the cash alternative instead.
In keeping with the Governments push towards ULEV’s, any vehicle which emits under 75g/km of C02 will be exempt from these tax changes so these vehicles are likely to offer the most financial reward.
If the employee has always chosen to take the cash alternative they are NOT AFFECTED by the changes which took effect in April. Tax payable will be calculated in the same way as before April.
3. Salary Sacrifice – AFFECTED
Salary sacrifice can work as an advantage for both the employee and the employer. The employee will have a lower salary and so pay less tax and national insurance, the employer can also save as class 1 National Insurance contributions are not made on the value of the sacrificed salary.
Salary Sacrifice has been affected by the new rules effective from April 6th 2017.
There was a reported 30% increase in those using the salary sacrifice scheme from 2010 to 2016. The more salary was sacrificed, the less tax the Government collected. The new rules will limit who will benefit from the scheme.
Previously those who funded a car in this way would pay benefit in kind tax. Now the value of the benefit in kind tax payable will be compared to the tax payable on the amount of salary sacrificed. The employee will then be charged on whichever amount is higher.
The new rules will only apply to salary sacrifice schemes registered on or after April 6th 2017 and there are some exceptions. When considering cars, those with ultra-low emissions under 75g/km of Co2 will be exempt from the changes.
The company car is not dead! Employers just need to be smart in the choices of car on offer to make sure this perk remains exactly that. The Government has announced a ban on the sale of new petrol and diesel cars from 2040 and until then will be encouraging the use of ultra-low emissions vehicles in tax rules. No matter which way you fund your employee’s car, offering an electric or low emission vehicle is likely to have the kindest tax implications as we head towards the electric revolution!
Article by: Natalie Faughy – Expert in the Automotive Industry with a particular interest in vehicle leasing.