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Tips & advice

Company car tax guide 2020/2021: everything you need to know

Strict new emissions tests will affect how much company car tax we pay. Here we look at how the system is changing

Company cars have long been used by businesses to reward and retain staff as an extra perk on top of a standard salary. Unfortunately, the Government or, more precisely, HM Treasury, is aware of this kind of incentive and levies tax on company cars. 

This company car tax is called Benefit-In-Kind (BIK) tax, as the cars are seen as an additional taxable benefit that falls outside of your standard salary with its income tax and National Insurance tax contributions. Whether you’re in a traditional company car scheme or gifted a company car allowance, it’s important to know how much tax you can expect to pay - especially if you’re the one choosing your company car.

BIK tax is one of many revenue streams used by Her Majesty's Revenue and Customs (HMRC) to keep Government coffers topped up, and as a result it's subject to annual changes. Invariably, this sees an increase in the amount of taxation levied on company cars as a whole.

Company car tax changes 2020/2021

Remember the old HMRC advert that claimed “tax doesn’t have to be taxing”? Whoever coined that slogan obviously had no idea what would happen to the company car Benefit-in-Kind (BiK) tax system in the 2020/21 financial year, which starts on 6 April. 

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These changes, announced in July 2019, are a response to the new European WLTP (World harmonised Light vehicle Test Procedure) emission and economy tests, which see new cars assessed using stricter, more realistic criteria than the old NEDC tests involved.

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One of the results of these new tests is that a car will have higher on-paper CO2 (carbon dioxide) emissions if assessed under WLTP rather than NEDC regulations – even though it’s the same car so on-the-road emissions will be identical.

Because company car Benefit-in-Kind tax rates are based on how much carbon dioxide (CO2) a car emits, this would result in higher taxation for company car drivers with WLTP-assessed cars.

So the Treasury is changing its BiK rates to take account of the higher on-paper CO2 emissions derived from the new emissions tests; it’s an attempt to ensure drivers with company cars tested under the WLTP regime aren’t unfairly penalised. The way this is being done is by splitting company cars into two groups and using two new, separate sets of Benefit-in-Kind percentage values. The resultant system may be fairer than if the Treasury had left things unchanged, but it has created a structure that is somewhat complicated, to say the least.  

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Just to show how complicated this system is, a diesel car first registered from 6 April 2020 would have attracted a BiK rate of 33 per cent in the 2020/21 financial year because it is not RDE-compliant and attracts the four per cent diesel surcharge. The new rules, however, knock two per cent off its BiK in the 2020/21 financial year because it was assessed under WLTP criteria, although this cut disappears over the following two years.

It’s also worth noting that CO2 emissions for cars registered from 6 April 2020 are likely to be around 20 per cent higher than those of NEDC-assessed cars. Though this does vary from model to model. 

Company cars tax bands 2020/2021

NEDC cars first registered before 6 April 2020

For cars that were registered before 6 April 2020, NEDC-corellated figures are used for the 2020/21 financial year when calculating Benefit-in-Kind tax rates.

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The tables for these cars are different from the ones the Treasury previously projected it would use for 2020/21, with rejigged CO2 bands, and different percentage rates in many areas.

Predicated on a 20 per cent taxpayer and a £30,000 car; Group two cars assume a 20 per cent increase in CO2 figures, due to WLTP 

Cars first registered before 6 April 2020

 

Financial year

2020/21

2021/22

2022/23

Petrol, first registered before 6 April 2020, CO2 = 114g/km

 

27%     

27%

27%

Annual tax liabilities

 

£1,620             

£1,620

£1,620

Diesel, RDE2 non-compliant, first registered before 6 April 2020, CO2 = 100g/km

 

29%

29%

29%

Annual tax liabilities

 

£1,740

£1,740

£1,740

PHEV, 29-mile EV range, CO2 = 37g/km, first registered before 6 April 2020

 

14%

14%

14%

Annual tax liabilities

 

£840

£840

£840

EV, first registered before 6 April 2020

 

0%

1%

2%

Annual tax liabilities

 

£0

£60

£120

WLTP cars first registered from 6 April 2020 

For cars that are first registered after 6 April 2020, the new WLTP CO2 figures will be used to determine BiK rates.

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However, to reflect the fact that WLTP CO2 rates are typically higher than NEDC rates for exactly the same model of car, the Treasury is knocking two percentage points of BiK off the rates used for older, NEDC-assessed cars. 

However, it’s worth noting that this reduction will fall to one per cent in the 2021/22 financial year, and will disappear altogether in the following year. This means that, even if your car was tested under WLTP and therefore has higher on-paper CO2 emissions than an equivalent NEDC-tested car, there will be no reduction in its BiK rate from April 2022.

Cars first registered from 6 April 2020

 

Financial year

 

2020/21

2021/22

2022/23

Petrol, first registered from 6 April 2020, CO2 = 137g/km

 

30%

31%

32%

Annual tax liabilities

 

£1,800

£1,860

£1,920

Diesel, RDE2 non-compliant, first registered from 6 April 2020, CO2 = 120g/km

 

31%

32%

33%

Annual tax liabilities

£1,860

£1,920

£1,980

PHEV, 29-mile EV range, CO2 = 44g/km, first registered after 6 April 2020

 

12%

13%

14%

Annual tax liabilities

 

£720

£780

£840

EV, first registered from 6 April 2020

 

0%

1%

2%

Annual tax liabilities

 

£0

£60

£120

What about electric cars?

Pure electric cars will not be subject to any Benefit-in-Kind tax at all for 2020/21 – regardless of when the car was registered. In 2021/22 they will attract a BiK rate of only one per cent, and in 2022/23 just two per cent. This means company car drivers who choose an EV will save thousands compared with the driver of a comparable diesel.

What about the diesel surcharge? 

Diesel cars not meeting the RDE2 element of WLTP tests will continue to be subject to a four per cent higher BiK rate than petrol cars. A number of makers – including Jaguar Land Rover, BMW, Mercedes and Vauxhall – produce RDE2-compliant cars, though, so it’s still possible to take advantage of the reduced tax rates that diesels incur thanks to having low CO2 emissions compared with their petrol equivalents.

So is now the time to choose a pure-electric or plug-in hybrid company car?

Yes, if you can. EVs have the most attractive BiK rates, but plug-in hybrids (PHEVs) also attract less tax. A ‘typical’ PHEV, for example, can do around 25 miles on battery power alone and will have 49g/km CO2 emissions; such a car would attract a BiK rate of just 12-14 per cent. 

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A typical petrol might emit 130g/km of CO2, attracting a BiK rating of 29-31 per cent, while a typical non-RDE2-compliant diesel might emit 105g/km, making its owner liable for a 28-30 per cent BiK rate.

What about road tax? Isn��t that increasing as well?

In much the same way as with company car tax, WLTP measurements are replacing NEDC CO2 readings for road tax (vehicle excise duty) from this year – although from 1 April rather than 6 April. 

But while BiK rates apply every year for company car drivers, only the first year of road tax is linked to CO2 emissions, with a flat rate for following years. Because of this, and because of the fact first-year road tax costs are typically lumped into a new car’s on-the-road price, any increased charges related to WLTP being used for road tax rates will not hit buyers as sharply in the wallet.

If, for example, a car with NEDC CO2 emissions of 115g/km has 138g/km CO2 emissions thanks to WLTP (a 20 per cent increase), customers would have to make an extra one-off payment of £40 compared with when NEDC figures were used. However, it should be highlighted that some jumps are bigger. A car with NEDC CO2 emissions of 150g/km might increase to 180g/km under WLTP, which would result in its first-year road tax increasing from £210 to £855.

Guide to company car tax terms

  • BiK (Benefit-in-Kind): the tax on a non-salary perk such as a company car, provided by an employer to an employee.
  • CO2 (carbon dioxide): pollutant produced by cars with a petrol or diesel engine, measured in grams per kilometre (g/km), and used to set tax.
  • BiK rate: the percentage of a company car’s value that is taxed. The more CO2 a car emits, the higher its BiK rate.
  • NEDC (New European Driving Cycle): the old test procedure for measuring car emissions and fuel economy.
  • WLTP (Worldwide harmonised Light vehicle Test Procedure): the new economy and emissions test procedure; all new cars registered from September 2019 are assessed under WLTP.
  • RDE2 (Real Driving Emissions, Step 2): RDE emission tests take place on the road as an element accompanying the lab-based WLTP assessments. RDE2 sets stricter emission limits than the previous RDE1 standard.
  • Diesel surcharge: diesel company cars not complying with the RDE2 element of WLTP tests are automatically hit with a four per cent BiK increase compared with their petrol-engined equivalents.

Full company car tax bands 2020/21 – cars first registered from 6 April 2020

CO2 emissions (g/km)

 

Electric range (miles)

 

Appropriate percentage

 

0

 

N/A

 

0%

 

1-50

 

>130

 

0%

 

1-50

 

70-129

 

3%

 

1-50

 

40-69

 

6%

 

1-50

 

30-39

 

10%

 

1-50

 

 

12%

 

51-54

 

N/A

 

13%

 

55-59

 

N/A

 

14%

 

60-64

 

N/A

 

15%

 

65-69

 

N/A

 

16%

 

70-74

 

N/A

 

17%

 

75-79

 

N/A

 

18%

 

80-84

 

N/A

 

19%

 

85-89

 

N/A

 

20%

 

90-94

 

N/A

 

21%

 

95-99

 

N/A

 

22%

 

100-104

 

N/A

 

23%

 

105-109

 

N/A

 

24%

 

110-114

 

N/A

 

25%

 

115-119

 

N/A

 

26%

 

120-124

 

N/A

 

27%

 

125-129

 

N/A

 

28%

 

130-134

 

N/A

 

29%

 

135-139

 

N/A

 

30%

 

140-144

 

N/A

 

31%

 

145-149

 

N/A

 

32%

 

150-154

 

N/A

 

33%

 

155-159

 

N/A

 

34%

 

160-164

 

N/A

 

35%

 

165-169

 

N/A

 

36%

 

170+

 

N/A

 

37%

 

Full company car tax bands 2020/21 – cars first registered before 6 April 2020

CO2 emissions (g/km)

 

Electric range (miles)

 

Appropriate percentage

 

0

 

N/A

 

0%

 

1-50

 

>130

 

2%

 

1-50

 

70-129

 

5%

 

1-50

 

40-69

 

8%

 

1-50

 

30-39

 

12%

 

1-50

 

 

14%

 

51-54

 

N/A

 

15%

 

55-59

 

N/A

 

16%

 

60-64

 

N/A

 

17%

 

65-69

 

N/A

 

18%

 

70-74

 

N/A

 

19%

 

75-79

 

N/A

 

20%

 

80-84

 

N/A

 

21%

 

85-89

 

N/A

 

22%

 

90-94

 

N/A

 

23%

 

95-99

 

N/A

 

24%

 

100-104

 

N/A

 

25%

 

105-109

 

N/A

 

26%

 

110-114

 

N/A

 

27%

 

115-119

 

N/A

 

28%

 

120-124

 

N/A

 

29%

 

125-129

 

N/A

 

30%

 

130-134

 

N/A

 

31%

 

135-139

 

N/A

 

32%

 

140-144

 

N/A

 

33%

 

145-149

 

N/A

 

34%

 

150-154

 

N/A

 

35%

 

155-159

 

N/A

 

36%

 

160+

 

N/A

 

37%

 

Find out about the tax benefits of double cab pick-up trucks here... 

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