Company cars can be an expensive benefit to provide, but there are steps employers can take to reduce some associated costs, not least around tax liabilities. So how can employers keep tax low around this popular benefit?
If you read nothing else, read this…
- Choosing low-emission cars will keep tax bills low.
- Green cars can boost employees’ interest and reduce tax.
- Benefit-in-kind (BIK) tax is determined by the car’s list price and CO2 emissions.
To keep costs low, employers must first do their homework about the costs associated with running a company car scheme. For the most tax-efficient car, they need to consider the carbon dioxide (CO2 ) emissions of a car, which determines the tax rates. The government’s ongoing efforts to reduce the country’s CO2 emissions has led to the introduction of low-emission company car tax rules.
1. Put in a CO2 cap
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Capping CO2 emissions that company cars produce can help to keep tax low, because benefit-in-kind (BIK) tax is determined by the CO2 emissions and the car’s list price. Making cars availabile via a salary sacrifice arrangement can also help employers and staff save money, but it is vital that employers emphasise the savings to employees.
Terry Harvey, head of group tax at Hitachi Capital Vehicle Solutions, says: “The use of CO2 capping is increasingly frequent, ensuring only cars below certain emission levels are chosen. Limits are often linked to government policy; caps of 130g/km are commonplace. This limit ensures drivers’ BIK tax is no more than 25% over the next three years under existing rates. Employers also benefit because they can keep national insurance (NI) contributions down, which are linked to the car’s price.
“Cars under 50g/km CO2 will attract no more than 9% BIK tax for the next three tax years, with the cost increasing to 13% in 2018–19. Drivers tend to be focused on models in this tax band to keep their BIK costs under control.”
Iain Carmichael, chief commercial officer at car salary sacrifice provider Tusker, also advocates the benefits of capping CO2 emissions. “A sensible gap of around 120g to 130g of CO2 is what more employers are looking to offer,” he says.
2. Introduce green cars
Introducing green cars into a company car scheme could potentially increase take-up among employees, and help address CO2 output. Electric cars and plug-in hybrid electric cars offer the most significant savings through their ultra-low or zero CO2 emissions. “A company car being a green car is directly linked to its fuel efficiency and miles-per-gallon capabilities, so there are real savings to be made,” says Carmichael.
Shawn Healy, tax principal at accountancy network BDO International, adds: “Environmental factors are becoming part of the choices employees make about cars. Government policy seems to have pushed manufacturers into selling more green cars.”
BDO introduced a car salary sacrifice scheme for its 3,000 employees in September 2014.
There is now a much greater range of low-emission cars available on the market. Carmichael says: “Green cars are nowhere near as restrictive in choice as they were a few years ago. Such a broad range of green cars being on offer gives employees much more control.”
More electric cars are also being sold, which is driving their price down, and making charging points more widespread, says David Brennan, chief executive officer at Nexus Vehicle Management. “As an extra incentive, electric cars should not be taxed,” he adds.
3. Follow the manufacturers’ lead
Even the lowest-emission cars will be subject to tax rises over the next five years, but as manufacturers strive to reduce emissions, company car drivers and employers can look to maintain tax rates that are similar to, or lower than, the current rates. “We will undoubtedly see more models become available with low or ultra-low emissions,” says Harvey.
And with just 16% of employees considering an electric car as their next company car , according to research by the Leasedrive Group released in March 2014, there is clearly more that could be done around highlighting the benefits of green cars to improve tax savings.