How will the change in Tax year effect the tax you pay on your company electric vehicle?
My Mate Says…the change in Tax year will effect the tax you pay on your company electric vehicle?
With the knowledge around climate change improving daily and the technology behind electric cars evolving, there has been a surge in employers and employees becoming more environmentally conscious and opting for the use of electric vehicles. Additionally, one of the great financial benefits of purchasing an electric car for business use is the corporate tax deduction.
First year allowances.
First year allowances give businesses 100% capital allowance deductions if the asset acquired qualifies for this relief.
For a few years now, businesses have been able to claim first year allowances on cars with low emission levels or on electric cars. Each year the emissions deemed as ‘low’ have been reducing to cater for the change in knowledge around carbon emissions and its repercussions. However, if you purchased a fully electric car then you would be entitled to 100% deduction against tax profits.
For example for a company car: priced at £40,000 that is fully electric you would be able to claim 100% capital allowance deduction which would give you a tax saving at 19% (corporation tax relief) so effectively you would not pay tax on the £40,000.
The corporation tax policy is due to change again before March 2021, it gives us a small window of opportunity to act now on the 100% corporation tax deduction via capital allowances for this allowance to qualify.
As the employer you are also required to pay class 1 A national insurance which is calculated at 13.8% of the benefit in kind value.
Benefit in Kind.
The complications with this policy tend to start when a business allows someone to use a car for personal purposes as well as business needs as this becomes a taxable benefit in kind. Every year the taxable benefit in kind is re-evaluated and changes, so it very rarely stays consistent year on year, see below for further details.
For example for an employee using a company car: originally purchased at £40,000 that is fully electric you currently have a benefit in kind value of £6,400 (16% X 40K) which would be taxed on you personally, the rate will depend upon whether you are a basic rate, higher rate or additional rate tax payer. So you could be paying £2,560 tax annually as a higher rate tax payer.
However, from he 6th of April 2020 these rules will change and the fully electric car will have a benefit in kind rate of 0%, which would therefore mean no tax would be due on this benefit for that tax year.
We won’t fully know the changes to the electric vehicle tax until the government release their annual budget which is due to become public on the 11th March 2020 with any changes coming into effect as of the 1st April so definitely keep an eye out for that to be released!
However, with the corporation tax policy due to change again before March 2021, it gives us a small window of opportunity to act now on the 100% corporation tax deduction via capital allowances for this allowance to qualify.
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