Despite year-on-year tax rises, company cars remain a popular benefit for employers to provide to staff.
While the tax cost of expensive high-emission cars can be eye-watering, as HSKS Greenhalgh Tax Director Martin Tomes explains, by choosing carefully it’s possible to offer a company car for a relatively low tax cost.
Company car tax rules reward those employers who choose greener cars as the tax charge on a low-emission car can be considerably lower than a car with high CO₂ emissions.
Looking towards the future, choosing an electric car will lower the bills further with a taxable amount as low as 2% of the list price.
So what do you need to know about offering company cars to your employees in 2018/19?
The tax charge
Company cars are taxed as a percentage of the list price, which is the manufacturer’s valuation of the car when new.
It doesn’t matter how much was paid for the car, or whether it was bought second-hand.
The list price is used to calculate the taxable amount and, where accessories are added, the list price is adjusted.
The percentage charged to tax (the appropriate percentage) depends on the level of the car’s carbon dioxide (CO₂) emissions, which increases each year.
The following appropriate percentages are in place for 2018/19:
|CO2 emissions||Appropriate percentage|
|Less than 50g/km||13%|
|51g/km to 75g/km||16%|
|76g/km to 94g/km||19%|
The appropriate percentage increases by 1% for each 5g/km rise in CO₂ emission above 94g/km, although a maximum charge of 37% applies to cars with CO₂ emissions of more than 180g/km.
As the appropriate percentage increased in April, some employees who drive company cars will pay more tax on their company vehicle in 2018/19.
Diesel cars attract a supplement, which increased from 3% to 4% for all cars that aren’t certified to the Real Driving Emissions 2 (RDE2) standard.
The supplement applies to cars registered on or after 1 January 1998, which:
• don’t have a registered nitrogen oxide (NOx) emissions value
• have a registered NOx emissions value that exceeds the RDE2 standard.
While the appropriate percentage is set by reference to CO₂ emissions, the new-look diesel supplement is dependent on NOx emissions level.
Under the new rules, RDE2-certified diesel cars are not subject to the diesel supplement.
In practice, it’s unlikely that cars on the market before 6 April 2018 will meet the RDE2 standard, and most older diesel cars will be subject to the higher supplement as a result.
Drivers choosing lower-emission cars are rewarded with lower tax bills.
For example, if an employee chooses a company car with CO₂ emissions of 40g/km, with a list price of £12,000, they would pay tax of £1,560 in 2018/19.
This would be £2,160 a year less than if the employee chose a company car with a similar list price but with CO₂ emission of 150g/km.
Electric cars with zero emissions are currently charged at the same percentage as cars with CO₂ emissions of 50g/km and below – 13% for 2018/19.
However, new emission bands will apply to cars with CO₂ emissions of 50g/km or less based on the electric range of the car from 2020/21 onwards.
Going electric will provide the opportunity to benefit from a lower tax bill from 2020/21 and this should be considered when choosing a new company car.
If you provide fuel to company car driving employees, for any private mileage, another fuel scale charge applies.
Private fuel is rarely a tax-efficient benefit unless private mileage is very high.
More tax will be payable on the fuel than on the car, where the cost of the car is below the appropriate fuel multiplier amount (£23,400 for 2018/19).
Talk to your tax adviser about tax efficient company cars and fuel.