November 23, 2016

Autumn Statement increases taxes on salary sacrifice and freezes fuel duty

Final Autumn Statement as Budget switches to later in the year

Chancellor Philip Hammond delivered his first – and last – Autumn Statement in an attempt to create an economy that works for everyone. But several of the measures announced will inevitably mean that it works less well for some than others.

The Chancellor also revealed for the first time the cost of Brexit to the country in terms of lower productivity and slower economic growth which would mean that borrowing over the next five years would need to be an extra £122bn.

The Autumn Statement will now be abolished to be replaced by an Autumn Budget Statement and a much more low-key announcement in the spring in response to the Office of Budget Responsibility. “A reform that was long overdue and in line with best practice in other parts of the world,” the Chancellor said.

Major changes to salary sacrifice

One of the most far-reaching changes the Chancellor announced was to salary sacrifice schemes, which have proliferated throughout both public and private sectors in recent years.

The Chancellor said that such schemes had led to some employees paying less tax than their colleagues, which was not fair.

As a result, those opting to take benefits through salary sacrifice would, from April, pay the same tax as if they had been provided through their cash income, a move set to raise an extra £85m in taxes during the 2017/18 tax year.

This would then increase to an extra £235m per year in the 2018/19, 2019/20 and 2020/21 financial years in terms of increased tax revenues.

There were exceptions to this new rule, however, and exempt from the changes were ultra low emission vehicles (ULEVs), pension savings, childcare vouchers and cycle to work schemes.

Arrangements in place before April 2017 will be protected until April 2018, and arrangements for cars, accommodation and school fees will be protected until April 2021.

What are ULEVs?

The Government defines (ULEVs) as cars or vans with tailpipe CO2 emissions of 75 g/km or less.

At last year’s Autumn Statement, then Chancellor George Osborne announced that the Government was putting aside £600m to support the market and manufacturing of ultra-low emission vehicles with a target of 25% of European EVs being built in the UK.

This was part of the Government’s commitment to continue towards 100% zero emission vehicle sales by 2040. The investment was said to save 65 million tonnes of carbon, as well as helping with air quality issues.

The new rules on salary sacrifice are likely to give a further boost to such low-emitting vehicles, which is very much in the Government’s interests, although choice at the moment is still limited.

What will it mean for salary sacrifice car schemes?

Existing schemes are protected for four years and there are growing numbers of vehicles with CO2 emissions of 75g/km, which are only going to increase over time.

So while it is not the news that the fleet industry would necessarily want, it still means that those with existing arrangements can enjoy them for a further four years before switching perhaps to an even lower emission vehicle.

The announcement may now mean a rush of new car orders through salary sacrifice car schemes between now and next April as drivers seek to take advantage of existing rules.

Changes to company car tax

Changes to the Benefit in Kind company car tax system from 2020 will prioritise electric vehicles, according to measures announced in the Autumn Statement.

The Statement reintroduces a BiK band for 0g/km vehicles which had been removed last April, and adds a sliding scale for plug-in hybrid and range-extended electric models which emit 50g/km or less.

Replacing a single sub-50g/km band, it follows a consultation earlier this year which was aimed at providing an incentive for manufacturers to move beyond hybrid vehicles with limited electric mile range, which risk being driven in combustion engine mode most of the time.

From April 2020, fully-electric cars will be taxed at 2%. Vehicles emitting between 1g/km and 50g/km – plug-in hybrids and range-extenders – will vary, with BiK bands between 2% and 14% depending on how far they can travel on battery power.

There will be a 1% increase per band, up to a maximum 37% rate, for cars emitting 90g/km or more. This is expected to raise an additional £30m in the 2020/21 and 2021/22 financial years, according to the Autumn Statement’s supporting documents.

Fuel duty frozen

Amongst more positive news, the Chancellor also announced that fuel duty would remain frozen, as the price of oil had risen by 60% since January, putting the planned rise on holds for the seventh successive year and making the current fuel duty freeze is the longest for 40 years.

In total, this initiative was expected to save the average car driver £150 a year and the average van driver £350 a year, and amounted to a tax cut worth £850m next year, the Chancellor said.

Roads spending and other investment

The Chancellor also announced extra investment in the country’s transport infrastructure with an additional £1.1bn for work on the roads network in England, and a further £220m for ‘pinchpoints’ on major strategic roads.

He also revealed a £390m investment to “build on our competitive advantage in low emission vehicles and the development of connected autonomous vehicles”.

There was also a 100% first-year allowance (FYA) for expenditure incurred on electric charge-point equipment, as well as an additional £80m investment to install public charging infrastructure.

Insurance premium tax rise

Insurance Premium Tax (IPT) is to rise from 10% to 12% from the start of June 2017, though The Government confirmed its intention to legislate next year to end the compensation culture around whiplash claims and help keep prices down.

The Chancellor said the new rate was still lower than many other European countries, explaining that the rise was “in order to raise revenue which is required to fund the spending commitments I am making today”.

IPT is a tax on insurers and so any impact on premiums depends on insurers’ commercial decisions, said the Treasury.