Sarah Bradford looks at some changes to the company car tax rules taking effect from 6 April 2021.
Various changes to the company car tax rules came into effect from 6 April 2020, including a new way of measuring carbon dioxide (CO2) emissions and changes to the taxation of low emission cars. One year on, there are further tweaks affecting the 2021/22 tax year.
Recap: how company cars are taxed
A tax charge arises under the benefit-in-kind rules when an employee is provided with a company car which is available for his or her private use. The taxable value of the benefit (known as the ‘cash equivalent’ value) is a percentage (known as the ‘appropriate percentage’) of the list price of the car and any optional accessories, as reduced for any capital contributions (capped at £5,000).
The appropriate percentage depends on the car’s CO2 emissions, and where appropriate, whether it is a petrol or a diesel car. For 2021/22, as for 2020/21, the appropriate percentage also depends on when the car was first registered and whether this was prior to 6 April 2020 or on or after this date. The car’s electric range also affects the appropriate percentage where the car is a low emission car with CO2 emissions between 1 and 50g/km.
Once the appropriate percentage has been applied to the price of the car and accessories, the result is reduced proportionately if the car was only available for the employee’s private use for part of the tax year. It is also reduced for any contributions made by the employee for the private use of the car.
Determining the CO2 emissions
The way in which a car’s CO2 emissions are determined changed for cars registered for the first time on or after 6 April 2020. From that date, the CO2 emissions of new cars are determined in accordance with the World Light Vehicle Test Procedure (WLTP). A different procedure, the New European Driving Cycle (NEDC), was used to ascertain the CO2 emissions for cars which were registered for the first time prior to 6 April 2020. For 2020/21 and 2021/22, with the exception of zero emission cars, this change has an impact on the appropriate percentage.
For 2020/21, the appropriate percentage for cars with CO2 emissions that were first registered on or after 6 April 2020 and whose emissions are measured using the WLTP is two percentage points lower than a car with the same CO2 emissions which was first registered prior to 6 April 2020 and whose emissions were measured using the NEDC. For 2021/22, the difference is reduced to one percentage point. This is achieved by increasing the appropriate percentage for cars first registered on or after 6 April 2020 by one percentage point, while leaving the appropriate percentages for cars first registered prior to 6 April 2020, other than for zero emission cars, unchanged.
The figures are aligned from 6 April 2022. The appropriate percentages for cars first registered on or after 6 April 2020 are increased by a further percentage point for 2022/23, while the appropriate percentages for cars registered before 6 April 2020, other than for zero emission cars, again remain unchanged.
The maximum charge is capped at 37%.
Diesel supplement
Regardless of the method used to determine the car’s CO2 emission, a supplement of 4% applies to diesel cars that do not meet the real driving emissions step 2 (RDE2) standard. The application of the diesel supplement cannot take the appropriate percentage above the maximum level of 37%.
Impact on your tax bill
The impact on your 2021/22 tax bill as compared to 2020/21 depends on the date the car was first registered and whether the car is an electric car.
Employees who have a company car which has CO2 emissions will pay the same amount in tax for 2021/22 as for 2020/21, if their car was first registered on or after 6 April 2020. However, employees with newer cars with CO2 emissions which were first registered on or after 6 April 2020 will see an increase in their tax bill, unless they were already paying the maximum charge.
Example 1: A tale of two cars
Rose has a company car which has CO2 emissions of 65g/km. The car was first registered on 6 April 2020. It has a list price of £25,000.
For 2020/21, the appropriate percentage is 16% and the cash equivalent of the benefit is £4,000 (£25,000 @ 18%). If Rose is a higher rate taxpayer, she will pay tax of £1,600 on the benefit, and if she is a basic rate taxpayer she will pay tax of £800 on the benefit. Her employer will pay Class 1A National Insurance contributions (NICs) of £552 (£4,000 @ 13.8%).
For 2021/22, the appropriate percentage is one percentage point higher, at 17%, and the cash equivalent value is £4,250 (£25,000 @ 19%). The associated tax bill is £1,700 for a higher rate taxpayer and £850 for a basic rate taxpayer. The employer will pay Class 1A NICs of £586.50.
Lily also has a company car with CO2 emissions of 65g/km and a list price of £25,000. However, her car was first registered on 1 March 2020.
For 2020/21, the appropriate percentage is 18% and the cash equivalent of the benefit is £4,500 (£25,000 @ 18%), costing her £1,800 in tax on the benefit if she is a higher rate taxpayer and £900 in tax if she is a basic rate taxpayer. Her employer will pay Class 1A NICs of £621 (£4,500 @ 13.8%). The appropriate percentage remains unchanged at 18% for 2021/22, so she will pay the same in tax in 2021/22 on her company car, as in 2020/21.
Electric cars
For 2020/21, it was possible to enjoy the benefit of an electric company car tax-free. This was because the appropriate percentage for zero-emissions was set at 0% for 2020/21 both for cars registered on or after 6 April 2020 and those first registered before that date.
From 6 April 2021, the appropriate percentage for zero emission cars is increased to 1%, regardless of the date of the car’s first registration. While this means that an electric company car will no longer be a tax-free benefit, the tax charge is minimal, and as such an electric company car remains a very tax-efficient benefit.
Example 2: Electric company car benefit
Robin has an electric company throughout 2020/21 and 2021/22. The car was first registered in March 2020 and has a list price of £30,000.
For 2020/21, the taxable benefit was nil and Robin was able to enjoy the private use of the car tax-free.
For 2021/22, the appropriate percentage is 1%. Consequently, the amount taxed in respect of the private use of the car (the car’s cash equivalent value) is £300. This will cost a higher rate taxpayer £120 in tax and a basic rate taxpayer £60 in tax.
By any measure, this is something of a good deal.
Low emission cars
The appropriate percentage for cars whose emissions fall within the 1-50g/km band also depends on the car’s electric range (also known as its zero emission mileage). This is the number of miles that can be driven on a single electric charge. For cars in this band, a lower appropriate percentage applies to those with a greater electric range.
As with other cars with CO2 emissions, the appropriate percentage for cars first registered on or after 6 April 2020 is one percentage point higher for 2021/22, meaning that drivers of a low emission company car first registered on or after that date will pay slightly more tax in 2021/22 than in 2020/21. The appropriate percentage for low emission cars registered before 6 April 2020 remains unchanged for 2021/22, and as such the tax bill will be the same for 2021/22 as for 2020/21.
However, drivers of low emission cars first registered before 6 April 202O will pay more tax in 2021/22 than drivers of low emission cars with the same CO2 emissions and electric range which were registered on or after that date – the appropriate percentage being one percentage point higher.
Practical tip
Despite the tax rises for electric cars and those first registered on or after 6 April 2020, an electric or low emission car with a good electric range remains a tax efficient benefit in 2021/22.
