Iain Rankin looks at changes affecting the benefit-in-kind charge for company car users in the tax year 2020/21.
Due to the benefit-in-kind (BIK) system, leasing a personal vehicle via a limited company is often less tax-efficient than leasing privately and reclaiming business mileage. However, the tax year 2020/21 brings changes that make low carbon dioxide (CO2) emission cars far more appealing as company vehicles.
The BIK system ensures that company assets provided to an individual for personal use incur a personal tax charge on the individual. With cars, this charge is based on the vehicle’s CO2 emissions. If the vehicle has high emissions, leasing via a company is unlikely to be tax-efficient; the personal tax charge will often offset the corporation tax savings entirely.
What’s changing?
Until September 2017, all cars had CO2 emission values based on the NEDC (New European Driving Cycle) test, but the following year saw a transition period moving all new cars to WLTP (Worldwide Harmonised Light Vehicle Test Procedure) CO2 values after September 2018.
BIK rates have since remained in place based on the NEDC figures, but from 6 April 2020, the new BIK rates will use figures from the latest WLTP test procedure, which gives a more realistic representation of fuel economy. Ultimately, this is good for electrics, but bad for gas-guzzlers.
Zero-emissions
Currently, the BIK rate for electric and hybrid cars is 16%, with hybrids having adjusted rates dependent on CO2 emissions.
However, for the 2020/21 tax year, any electric cars with zero CO2 emissions will drop to a 0% BIK rate, making fully electric cars significantly more favourable from a tax perspective. Looking ahead, this rate will increase to 1% for the 2021/22 tax year, and again to 2% in 2022/23. Fortunately, the 0% rate for 2020/21 will also apply to zero-emissions cars registered before 6 April 2020, increasing at the same rate as for new cars in the following two years.
Low emissions
Hybrids with emissions between 1-50g/km will also see rates falling from the current 16% to between 3-12%, depending on the car's CO2 output and electric-only driving range.
Theoretically, this means that chargeable hybrids could also qualify for the 0% rate if the battery can carry them more than 130 miles, but unfortunately current models are far from achieving this. Unlike the zero-emission cars, low-emissions hybrids will see their rates remain static for the next three years. Cars in the 1-50g/km emissions bracket registered before 6 April 2020 will also enjoy a reduction in BIK tax, dropping from 16% to between 2% and 14%; again, this is also dependent on pure electric driving range.
High emissions
Cars with high CO2 emissions will also see their BIK rates drop between 1% and 6% lower from current levels (aside from the worst offenders in the 37% bracket). However, due to the fact that these rates will be based on the figures produced in the latest WLTP test procedure after 6 April 2020, the switch to higher CO2 figures will essentially mean that the aforementioned rate reductions are completely offset in most cases.
It is also worth noting that the existing 4% surcharge on diesels that do not meet RDE2 (real driving emissions step 2) standards will still apply for 2020/21, but diesel plug-in hybrids (classed as alternative-fuel vehicles) will be exempt from this.
Ultimately, although actual CO2 emissions won’t change, the switch to the more-realistic WLTP figures will mean that over 50% of all new cars can expect to see their official CO2 emissions rise between 10% or 20%. This may push the BIK rate of certain hybrids up one or two tax bands, but diesel and petrol vehicles could move up several tax bands compared with current levels.
Practical tip
Every vehicle has different emissions and electric driving range; you should speak to your tax adviser to find out how these changes will affect you.
