Budget 2015 brings company car tax surprises for drivers
Now that the dust has settled following the 2015 Budget Statement, it’s a good time to assess the impact of some of the measures announced by Chancellor George Osborne.
And one thing that has become increasingly apparent is the effect that the Budget will have on the tax bills of company car drivers in three to four years’ time – an impact that requires careful consideration now in terms of vehicle choice.
As signposted previously by the Chancellor, company car tax goes up by 2% for this current tax year, 2015-16, and by the same amount for each of the next three years, for all cars emitting more than 75g/km of carbon dioxide.
However, the Chancellor also announced that the Benefit-in-Kind tax rates on company cars will increase by a further 3% in 2019-20, a move that has set alarm bells ringing across the fleet industry.
Company car tax harvest set to rise dramatically
Latest estimates put the additional tax harvest from company cars in 2019-20 for the Exchequer at £340 million – an eye watering 171% increase over the amount signalled in the 2014 Budget, just 12 months ago.
For company car drivers locked into three and four years deals this spells bad news and adds hundreds of pounds to their annual company car tax bills.
And for those seeking a greener route to avoid the tax rises by selecting Ultra Low Emission Vehicles (ULEVs), there’s further bad news as the tax rates for the low carbon emitting cars will also rise by 3% in three year’s time.
Two new tax bands for ULEVs come into force from this month as these low carbon-emitting vehicles lose their tax free status for the first time.
The first tax band attracts BIK rates of 5% for petrol models and 8% for diesel models emitting 1-50g/km, while the second sees rates of 9% for petrol and 12% for diesel for vehicles emitting 51-75g/km.
From next year, 2016/17, the current 3% diesel surcharge is abolished for all vehicles, and for ULEVs the tax rates become a standard 7% for all models emitting 1-50g/km and 11% for all models emitting 51-75%.
This rises to 9% and 13% respectively in 2017/18, 13% and 16% in 2018-19 and up as high as 16% and 19% by 2019-20, in a move which many fleet experts have called a disincentive for buyers of electric and other ultra-low emission vehicles.
Car drivers face rising costs
The new company car tax regime ushers in some of the hardest-hitting increases in recent memory, and leaves company car drivers facing considerable extra costs.
For example, if you selected a petrol engined company car emitting 120g/km this month and it was yours for the next four years, the percentage of list price on which you pay company car tax rises from 19% to 28% over that four year period. That equates to a rate increase of 47% over the four years.
Taking another specific example, a typical Ford Mondeo 2.0TDCi with a P11D value of £22,790, CO2 emissions of 107g/km and a BIK rate of 19%.
This tax year, 2015-16, a 20% tax payer faces a bill of £866 for their vehicle, while a 40% taxpayer will pay £1,732.
However, in 2019/20, when the BIK rate increases to 25% for the same vehicle, the 20% taxpayer has to find an additional £274 as their tax bill rises to £1,140, while the 40% taxpayer sees an increase of £548 in their tax bill to £2,280.
The impact is even more pronounced if you select a low emission producing vehicle like a plug-in hybrid.
Here, over the same four year period, the percentage of list price on which you pay company car tax goes up from 5% to 16% for a petrol engined vehicle with emissions of 1-50g/km, and 9% to 19% for a similar vehicle with emissions of 51-75g/km.
As an example, take a Mitsubishi Outlander PHEV, currently one of the most popular ULEVs on the market, with a PIID price of £42,899, CO2 emissions of 44g/km and a BIK charge of 5% in 2015-16.
That means that a 20% taxpayer pays £429 and a £40% taxpayer £858 in BIK tax in the current tax year. But by 2019-20, the BIK rate has more than tripled to 16% for the same vehicle – with pronounced effects.
A 20% taxpayer then faces a bill for £1,373, an extra £944, while a 40% taxpayer has to find a whopping £1,888 extra as their tax payment increases to £2,746.
And it won’t just be company car drivers who will feel the impact of the increases; their employers will also be hit in the pocket in the form of larger bills for National Insurance Contributions, adding to a significant on-cost across the whole fleet.
Companies pay Class 1A NICs on the value of the taxable benefits they provide to employees, including company cars, and as the value of the benefit rises, so does the NIC bill. The current rate is 13.8%.
With the additional BIK and NIC charges, companies running vehicle fleets of all sizes face significant on-costs over the next three to four years.
What to do next?
The forthcoming tax changes mean that companies and their drivers need to carefully consider the right combination of factors that best meet their needs. And one of the first ports of call should be their fleet management provider.
Expert advice and guidance can help steer your way through the potential quicksand of the forthcoming tax changes. Talk to you adviser about the best mix of vehicles to meet your fleet needs from both tax efficiency and suitability of purpose points of view.
Companies should look to specify fleet policies with CO2 levels as low as possible, as well as looking at introducing special ‘green’ variants for each grade of the car policy, such as hybrids or others ULEVs.
There are now far more models to choose from as carbon emission levels continue to come down from all the vehicle manufacturers, and this is a trend that will only increase over time.
By making the right vehicle choices now, fleet decision-makers can help mitigate the impact of the forthcoming tax increases and help make cost savings running into several thousand pounds over the typical four year life of a vehicle.
If you would like to discuss the impact of the tax increases in more detail, then please get in touch.