If you use a company car as an employee, or operate a company car scheme as an employer, it may be worth your while considering a hybrid for your next purchase.
As well as being a greener option on the road, hybrid cars can save more than the environment… they can save you money too.
Savings as an employee
You’ll pay tax on any company vehicle if you or your family use it outside of work, including for commuting, as it is considered a Benefit in Kind.
The tax you pay will vary, however, depending on:
- The P11D value (list price of the car plus any delivery fees)
- Whether you pay something towards its cost
- Whether you have it full or part time
- The vehicle’s CO2 emissions
Where hybrids bring real benefits is in having significantly lower emissions.
Take the example of a low emission hybrid car. The list price is £30,000 and the CO2 emissions are 45 g/km. Emissions at this gives a BIK rate of 7%. As an employee would pay tax on £30,000 x 7% = £2,100. Tax at 20% is £420 per year and £840 for a 40% tax payer.
A example of a non-hybrid car is list price £20,000 with CO2 emissions of 108 g/km. The employee would pay tax on £20,000 x 18% = £3,600. Tax at 20% is £720 and £1,440 for a 40% tax payer.
Car tax bands
To incentivise the purchase of more environmentally friendly cars, tax bands are now allocated according to vehicles’ CO2 emissions.
For cars registered since March 2001, a car will be placed in a tax band between A and M, where A represents the lowest CO2 emissions, up to and including 100 g/km, and M represents the highest, in excess of 255 g/km.
The current tax system includes two tax rates for each band:
- ‘First year’ tax is payable during the vehicle’s first year of registration and has rates ranging from £0 to £1,120
- ‘Standard rate’ tax is payable thereafter with rates varying from £0 to £515.
- Both the first year and standard rates increase with CO2 emissions.
- Hybrids are far more likely to fall within the lower tax bands, often incurring zero rates for both first and standard rate car tax.
If you were previously driving one of the higher rated vehicles, you could be making a significant saving of potentially hundreds of pounds per year.
London congestion charge
Another perk of driving a hybrid car is exemption from the London congestion charge – saving you £11.50 per day, which soon adds up! Thanks to the Ultra Low Emissions Discount Scheme introduced in July 2013, all vehicles that emit less than or equal to 75 gCO2/km and meet Euro 5 emissions standards qualify for 100% discount on the London congestion charge (subject to a £10 annual registration fee).
While any technology can qualify, some Euro 5 and 6 hybrid models have CO2 emissions under this threshold and most plug-in hybrids already qualify for the full 100% discount.
Savings as an employer
Enhanced Capital Allowances
In addition to standard capital allowances available for company vehicle ownership, businesses are able to claim an Enhanced Capital Allowance for green technologies. This allows a company to set the cost of the ‘green’ asset against its taxable profits in the first year following purchase, as long as it is used for business related activities.
From April last year new cars with tailpipe C02 emissions of less than 75 g/km became eligible, meaning most plug-in hybrids qualify for the ECA scheme. Until the end of March 2021, battery electric vehicles and the greenest ultra-low emission vehicles are eligible for a 100% ‘write-down’ in the first year of purchase.
Refuelling equipment for natural gas, biogas or hydrogen vehicles are also eligible under the ECA scheme.
An important change to note, however, is that while the ECA scheme will continue until 31 March 2021, the qualifying ECA threshold for low carbon vehicles will reduce from 75 g/km to 50 g/km from April 2018. This is to remain in line with the latest EU CO2 emission targets.
So as a quick check guide, businesses can claim the 100% allowance on a car provided that:
- The car is brand new, ie. ‘unused and not second hand’
- It is electric or has CO2 emissions of not more than 75 g/km (to March 2018)
- It is electric or has CO2 emissions of not more than 50 g/km (April 2018 to March 2021)
- The expenditure is incurred before 31 March 2021
Employer Class 1A NICs – April 2016 to March 2017
Class 1A National Insurance Contributions must be paid by employers if they also allow the personal use of company vehicles by employees.
As with company car tax, Class 1 NICs are based on the vehicle’s P11D value and relevant Benefit in Kind rate – which is determined by the official CO2 emissions and fuel type.
This is where savings are once again made based on the lower CO2 emissions of hybrid vehicles.
The level of NICs are also determined by an annual percentage rate which is announced in the Budget –currently this stands at 13.8% for financial year 2016-17.
You can calculate the amount of Class 1A NICs payable using the following:
NIC = P11D value x BIK rate based on CO2 x 13.8%
Useful links for further research
Next Green Car have some useful information and search tools that can help you decide on your next company vehicle. Use this search facility to find a list of all new cars which fall into a car tax band.
Or, if you’ve found a model you’re considering, check in their new car search, under make and model, to discover the car’s tax band.
Next Green Car’s ‘Top 10’ lists are also a useful read. Here’s their list of ‘Top 10 green cars to watch in 2016’.
If you would like any further advice on tax implications relating to company vehicles, please get in touch.