From 6 April 2020, the way in which carbon dioxide emissions for cars are measured is changing – read more here.

Zero charge for zero emission cars

From 6 April 2020, the way in which carbon dioxide emissions for cars are measured is changing – moving from the New European Driving Cycle (NEDC) (used for cars registered prior to 6 April 2020) to the Worldwide Light Testing Procedure (WLTP) for cars registered on or after 6 April 2020.

For an introductory period, the appropriate percentages for cars registered on or after 6 April 2020 are reduced – being two percentage points lower than cars with the same CO2 emissions registered prior to 6 April 2020 for 2020/21 and one percentage point lower for 2021/22. From 2022/23 the appropriate percentages are aligned regardless of which method is used to determine the emissions.

Zero emission cars

As part of the transition, the appropriate percentage for zero emission cars is reduced to 0% for 2020/21 and to 1% for 2021/22. This applies regardless of when the car was registered.

The charge was originally set at 2% for 2020/21 and 2021/22, and will revert to this level from 2022/23.

Impact

Electric company car drivers were already set to enjoy a tax reduction. The appropriate percentage for 2019/20 is 16% and was due to fall to 2% from 6 April 2020. However, the further reduction to 0% means that those who have opted for an electric company car can enjoy the benefit tax-free in 2020/21. Their employers will also be relieved of the associated Class 1A National Insurance charge.

Case study

Kim has an electric company car throughout 2019/20, 2020/21 and 2021/22. The car has a list price of £32,000. Kim is a higher rate taxpayer.

In 2019/20, Kim is taxed on 16% of the list price – a taxable benefit of £5,120. As a higher rate taxpayer, the tax hit is £2,048 (40% of £5,120). Her employer must also pay Class 1 National Insurance of 13.8% on the taxable amount (£706.56).

In 2020/21, the appropriate percentage is 0% so there is no tax or Class 1A National Insurance to pay. This is a significant reduction compared to 2019/20.

In 2021/22, the charge is 1% of the list price, equal to £320, on which the tax is £128 (assuming a 40% tax rate) and the Class 1A National Insurance is £44.16.

From 2021/22 the charge is 2% of the list price – equal to £640.

Not quite zero emissions

It is also possible to enjoy a company car tax-free in 2020/21 if it is registered on or after 6 April 2020, has emissions of between 1 and 50g/km (measured under the WLTP) and an electric range of at least 130 miles.

Go electric

The benefits of choosing electric cars from a tax perspective, as well as from an environmental one, are significant.

Partner note: ITEPA 2003, s. 139, 139A (as to be amended/inserted in accordance with draft Finance Bill 2019 clauses (see https://www.gov.uk/government/publications/taxable-benefits-and-rules-for-measuring-carbon-dioxide-emissions)).

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A quick summary of the new tax bands for CO2 car emissions which will be introduced from April next year:

Are low emissions cars tax efficient?

Significant changes are being made from 2020-21 to the company car tax benefits-in-kind bands affecting ultra-low emission vehicles (ULEVs).

The taxable benefit arising on a car is calculated using the car’s full manufacturer’s published UK list price, including the full value of any accessories. This figure is then multiplied by the ‘appropriate percentage’, which can be found by reference to the car’s CO2 emissions level. This will give the taxable value of the car benefit. The employee pays income tax on the final figure at their appropriate tax rate: 20% for basic rate taxpayers, 40% for higher rate taxpayers and 45% for additional rate taxpayers. This formula means that in general terms, the lower the C02 emissions of the car, the lower the resulting tax charge will be.

For 2019-20, the appropriate percentage for cars (whether fully electric or not) is 16% for those emitting 50g/km CO2 or below, and 19% for those emitting CO2 of between 51 and 75g/km. This means that the taxable benefit arising on a zero-emissions car costing, say £30,000 is £4,800, with tax payable of £960 for a basic rate taxpayer – for a higher rate taxpayer this equates to tax payable of £1,920

By way of comparison, a 2001cc petrol-engine car with a list price of £30,000, will attract an appropriate percentage of 37% in 2019-20. This equates to a taxable benefit charge of £11,100, and a liability of £2,220 a year for a basic rate taxpayer.

New bands

In April 2020, new ULEV rates will be introduced, and the most tax efficient cars will be those with CO2 emissions below 50g/km. There will also be additional financial incentives for electric only cars

From 2020-21, five new bandings are being introduced for full and hybrid electric cars. Fully electric (zero emissions) cars will attract an appropriate percentage of just 2%. This means that the tax benefit arising on an electric car costing say, £30,000 will be just £600. The resulting tax payable by a basic rate taxpayer will be £120 a year and £240 for a higher rate taxpayer.

For cars emitting CO2 of between 1 and 50g/km, the appropriate percentage will depend on the car’s electric range figure:

MileagePercentage
130 miles or more 2%
70 – 129 miles5%
40-69 miles8%
30-39 miles12%
Less than 30 miles14%

ULEVs with CO2 emissions of between 50g-74g/km CO2 will be on a graduated scale from 15% to 19% (as is currently the case, diesel-only vehicles will continue to attract a further 4% surcharge) as follows:

CO2 emissionsPercentage
51 to 54g/km15%
55 to 59g/km16%
60 to 64g/km17%
65 to 69g/km18%
70 to 74g/km19%
75 or more20%
Plus1% per 5g/km
Up to a maximum37%

Whilst the journey towards ‘greener’ driving has been, and continues to be, a rocky one, in 2014/15 a sub-130g/km petrol car was considered green enough to merit an 18% appropriate percentage. However, by 2020/21, the appropriate percentage on such a car will have risen to 30%. A sub-100g/km band car that was only subject to a 12% charge in 2014/15 will also have risen to 24% by 2020/21. On the other hand, clean air all-electric cars will finally plummet to 2% under the new company car tax incentives from April 2020.

The incentives in the new tax bands are clearly designed to encourage ULEVs as a company car driver’s car of choice, and with around 1 million company car drivers in the UK, this benefit is likely to remain one of the most popular and potent perks of a job.

Partner Note: ITEPA 2003, ss 139-142; Finance Act (2) Part 1 s2

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