Phil Fenn, Audit and Business Advisory Partner, and Jamie Wooldridge, Audit and Business Advisory Director at Mercer & Hole in Milton Keynes, discuss the financial incentives available to encourage businesses to look at greener alternatives.
In recent years, the government has used taxation in several ways to try to incentivise businesses to become greener. Measures like the Climate Change Levy and Landfill Tax discourage environmentally unfriendly behaviour with additional costs, whereas in other areas there are tax benefits available for reducing your carbon footprint.
The taxation of company cars has been a key area, and one which has been subject to big changes in government policy. For years, the taxation regime led many companies to provide diesel vehicles to their employees. However, in the wake of the ‘dieselgate’ scandal, taxation policy changed and there are now extremely low benefit-in-kind rates available for fully electric and hybrid vehicles.
“This provides opportunities for businesses to offer incentives to employees in a tax-efficient manner, but which many employers fail to take advantage of,” said Phil.
Company car benefit-in-kind rates
If we look at how the benefit-in-kind rates work for an electric Tesla Model 3 Standard range Plus against a petrol BMW 3 Series 320i Sport Saloon, using the rates applicable from April 2021, the figures show:
- List price: Tesla £40,490 – BMW £35,435
- Benefit-in-kind rate: Tesla 1% – BMW 33%
- Annual taxable benefit: Tesla £405 – BMW £11,694
- Estimated tax and National Insurance payable by higher rate taxpayer: Tesla £170 – BMW £4,911
- Class 1A NI payable by employer: Tesla £56 – BMW £1,614
We can see that the roughly equivalent Tesla and BMW models lead to vastly different taxable benefits. The Tesla would cost an average higher rate taxpayer £4,741 a year less in tax and National Insurance (NI). From the employer’s perspective, the initial cost of the Tesla is higher (by £5,055) but there is a saving of £1,558 a year in Class 1A NI which, over a three-year period, amounts to a total saving of £4,674.
Even taking an extreme example of a Porsche Taycan, retail price £138,830, the benefit-in-kind (1%) is still substantially less than the traditional petrol vehicle. There is a significant cost to the employer in the vehicle price, but perhaps employers will look to shift the balance of remuneration packages to allow for employees to take less of their total remuneration in salary and a higher proportion in the value of their company car.
We also need to consider the other major benefit available to employers when providing low emission vehicles to employees – a 100% first year capital allowance.
Low emission vehicles (including cars with CO2 emissions of less than 50g/km) qualify for a 100% first year allowance where the vehicle is purchased by the employer, either outright or on hire purchase.
The Tesla and Porsche would be deductible in full against the company’s profits for the year in which the car is provided. However, the BMW would be allocated to the special rate pool and qualify for an annual deduction of 6% on a reducing balance basis.
At a tax rate of 19%, the Tesla would save £7,693 in corporation tax in the year of purchase, whilst the BMW would only yield a tax reduction of £403. In comparison, the Porsche would yield a tax saving of £26,378, which would go some way to offset the higher initial cost.
The benefits don’t stop there
There are several other benefits associated with low emission vehicles, so if you are considering replacing any business vehicles or providing vehicles to directors or employees for the first time, get in touch with Phil or Jamie to discuss the options to avoid missing out on tax savings.
Call 01908 605552 or visit Mercer & Hole to find out more.