Benefits in kind
The annual employee benefit in kind on a company car is calculated by multiplying its manufacturer’s list price by a percentage determined by its CO2 emissions, going as high as 37% for new vehicles with emissions of 170g/km. Over the years, these percentages have crept steadily up, so even those maintaining the same vehicle for a number of years have seen their benefit increase annually.
With the benefit based on the original manufacturer’s list price, any second-hand vehicles are automatically put at a disadvantage as no consideration is made for the steep drop-off in value almost as soon as the car is driven off the forecourt.
If an employer provides fuel for the employee’s private use, then the same percentage is applied to an annual figure which for 2021/22 is £24,600. This charge is only avoided if the business and employee can demonstrate that there has been no fuel provided for private use throughout the tax year (or if the employee is formally required to fully reimburse the employer, and actually does so).
For an example of the annual benefit on a regular vehicle, I’ll take the vehicle with the most new registrations in 2021, the Vauxhall Corsa. If an employer were to provide a mid-range, automatic petrol model (1.2L SRI Edition) with a list price of £23,265, CO2 emissions of 123g/km and cover all the employee’s fuel costs, then the annual benefit in kind would be £13,402. Assuming the employee had no remaining tax-free personal allowance, at basic rate they would incur tax of £2,680.40 or, if they were higher rate, the tax incurred would be £5,360.80.
A fully electric variant with 0g/km emissions is available for the same model with a list price of £31,190, for which the benefit percentage for 2021/22 is only 1%, meaning the total benefit for the year would be £311.90. At the basic rate if income tax, this would incur tax of just £62.38 or, at higher rate, £124.76.
In addition, as electricity is not treated as “fuel”, the fuel benefit charge does not arise where an employer pays for the cost of charging the electric vehicle. There is also no employment benefit if the company pays to install an electric charge point at an employee’s home.
Companies are also required to pay Class 1A National Insurance on the value of the benefits in kind given to their employees. In the example above, the company would incur an annual liability for 2021/22 of £1,849.48 on the petrol version compared to £43.04 on the electric version.
From a corporation tax perspective, there are further tax advantages should the company purchase the vehicles provided to their employee in the example above.
For new and unused cars with 0g/km emissions, “First year allowances” are available, meaning that the company could deduct the full cost of £31,190 from its profits chargeable to corporation tax, giving relief at 19% of £5,926.10. The FYA on electric cars has been extended to April 2025.
The petrol version of the car would be treated as an addition within the company’s “Special rate pool”, meaning in the first year only 6% of the purchase price would be allowed against corporation tax, with a further 6% of the written down amount claimed in subsequent years. In the year of purchase, this would therefore only attract corporation tax relief at 19% of £265.22.
Cars, even the 0g/km models, are excluded from the capital allowance super-deduction which gives relief at 130% of the cost on certain assets.
savings in both corporation tax and Class 1A NIC, as well as the greatly
reduced tax burden on the employee, make up for the increased initial outlay of
£7,925 between the models.
With increasing demand for electric vehicles helping to both drive down the price and increase the range of makes and models available, they are now becoming a realistic and affordable option for companies to offer their employees and directors.
If you are looking at purchasing a new vehicle for your company then get in touch with your usual Lovewell Blake contact who will be able to advise you on the payroll and corporation tax implications. We will also be able to compete the P46(Car) forms notifying HM Revenue & Customs that a vehicle has been provided to an employee and the annual P11D forms which calculate and report the annual benefit and Class 1A NIC.