Changes to Benefit in Kind Tax Rates on Electric Cars – 2020/21 Guide

Originally announced in Autumn 2017, the chancellor confirmed in the emergency budget on the 11th March 2020, that for the 2020-21 tax year, benefits in kind will be significantly changed in favour of zero and low emission vehicles. The aim of this is to support the UK’s ULEV market, help the country reach climate change targets and improve air quality.

What does the changes to benefit in kind tax rates mean for UK Limited Companies?

Prior to 6th April 2020, under the old benefit in kind system as a director of a Limited Company, it was normally more beneficial to personally purchase a car, pay for all upkeep, fuel and repairs, and charge business mileage to the company. If a director (or employee) is provided with the use of a car owned by the company, and they are able to use the vehicle for personal use, a taxable benefit arises. The benefit is valued based upon a percentage of the list price, which is calculated in line with the vehicle’s level of CO2 emissions, meaning that lower emission cars will have a lower taxable benefit. National Insurance is then charged on this, and the value of the benefit is added to your Self-Assessment Tax Return, or employment income received through a change to your tax code.

From 6 April 2020, the benefit in kind rates for all-electric cars is reducing from 16% to 0%, which will result in significant tax and National Insurance contribution (NIC) savings. The BIK rate for an all-electric car is currently expected to then rise by 1% in 2021-22 and a further 1% in 2022-23. This rate should then be sustained through to the tax year ended 2024-25.

What is Benefit in Kind (BIK)

When a car is provided for an employee/director by their employer and is available for personal use, the employee/director must pay some tax on the effective benefit that they receive.
The government has set BIK rates to encourage employers and company car drivers to choose vehicles with lower CO2 emissions like electric cars or plug-in hybrids.

The Benefit in Kind (BIK) is calculated by taking the car’s P11D value (Can be found here and is the sum of the list price, delivery cost, VAT and option extras) and multiplying it by the BIK band percentage determined by its CO2 emissions (below). The tax you pay is then dependant upon your income tax band of 20%, 40% or 45% (England and Wales) or 19%, 20 %, 21%, 41% or 46% (Scotland).

Cars first registered before 6th April 2020

g/km CO2Percentage Charge g/km CO2Electric MilesPercentage Charge
0-5016 0N/A01222
51-7519 150> 13022222
76-9422 15070-12955555
95-9923 15040-6988888
100-10424 15030-391212121212
105-10925 150 301414141414
110-11426 51-54N/A1515151515
115-11927 55-59N/A1616161616
120-12428 60-64N/A1717171717
125-12929 65-69N/A1818181818
130-13430 70-74N/A1919191919
135-13931 75-79N/A2020202020
140-14432 80-84N/A2121212121
145-14933 85-89N/A2222222222
150-15434 90-94N/A2323232323
155-15935 95-99N/A2424242424
160-16436 100-104N/A2525252525
165-16937 105-109N/A2626262626
170-17437 110-114N/A2727272727
175-17937 115-119N/A2828282828
180-18437 120-124N/A2929292929
185-18937 125-129N/A3030303030
190-19437 130-134N/A3131313131
195-19937 135-139N/A3232323232
200-20437 140-144N/A3333333333
205-20937 145-149N/A3434343434
210-21437 150-154N/A3535353535
215-21937 155-159N/A3636363636
220+37 160+N/A3737373737

Cars first registered from 6th April 2020

g/km CO2Percentage Charge g/km CO2Electric MilesPercentage Charge
150> 13001222
150 301213141414

* Subject to confirmation in the Finance Bill and subject to future budgets.

Please note, if you take a directors salary and dividends up to the higher rate tax threshold, you will need to reduce your dividends paid by the Cash Equivalent benefit, in order to prevent yourself being pushed into the higher rate of tax, by the Cash Equivalent benefit.

If you would like details on a specific car, please provide to your dedicated accountant the model number, year and CO2 if know and they will advise.

Capital allowances for electric vehicles

For low emission and all-electric vehicles, businesses can claim Enhanced Capital Allowances (ECA) which work very much like first year allowances. In the first year of purchase, ULEVs are eligible for a 100% allowance providing that they are purchased brand new (not used or second hand).

All business can claim 100% ECA on cars provided that it is new or unused and CO2 emissions are 50 g/km or less (or is electric). There is a wide range of vehicles that will qualify for 100% ECAs.

Cars, which are not eligible for ULEVs, will continue to be eligible for capital allowances at 18%. Cars exceeding CO2 emissions of 110 g/km will be eligible for 8% capital allowances.

Government grants for purchasing low-emission vehicles

To support the incentives and further the attractiveness of ULEVs, there is a government grant available to both businesses and individuals when purchasing a new electric vehicle or plug-in hybrid (PHEV). Providing the CO2 emissions are below 50 g/km, the vehicle has an electric range of at least 70 miles, and costs less than £50,000, the government will grant up to £3,000 towards the purchase. The dealer most commonly handles this grant and they will deduct it during the purchase. The amount eligible for capital allowances will be the net spend, whereas, for benefits in kind, it will be calculated on the actual list price.

Furthermore, the government are offering grants of up to £3,000 towards installing charging points at home. This will noticeably improve the efficiency of the charging process.
Find more info about the Plug-In Grant, here.

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Posted by David Crossley

Senior accountant and SME specialist