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The cost of driving a 'greener' car

Newsletter issue - October 2017.

The financial benefits of driving a company car have continued to erode over recent years, but this benefit remains one of the most popular and potent perks of a job.

Broadly, the taxable benefit arising on a car is calculated using the car's full manufacturer's published UK list price, including the full value of any accessories. This figure is multiplied by the 'appropriate percentage', which can be found by reference to the car's CO2 emissions level. This will give the taxable value of the car benefit. The employee pays income tax on the final figure at his appropriate tax rate (e.g. 20% for basic rate taxpayers; 40% for higher rate taxpayers). In general terms, less tax will be payable on 'greener' cars those with lower CO2 emissions.

To provide stronger incentives for the purchase of ultralow emissions vehicles (ULEVs), at the 2017 Spring Budget, the government announced that new, lower bands will be introduced for the lowest emitting cars. The appropriate percentage for cars emitting greater than 90g CO2/km will rise by one percentage point. The changes, which are expected to take effect from 6 April 2020, are as follows:

Whilst at first glance these changes look positive, for 2017/18, the appropriate percentage for a car with a list price of £18,000 and CO2 emissions of just 50gkm, will be 9%. For a higher rate taxpayer, the taxable benefit will be £1,620 (£18,000 x 9%) and the tax payable will be £648 (£1,620 x 40%). In 2018/19, the tax payable by the employee will rise to £936 ((£18,000 x13%) x 40%), representing a 30% increase.

Compare this with an employee (also a higher rate taxpayer) driving a company car with a list price of £18,000, but CO2 emissions of 160g/km. The appropriate percentage for this car is 31% for 2017/18. The taxable benefit will be £5,580 (£18,000 x 31%) and the tax payable will be £2,232 (£5,580 x 40%). In 2018/19, the tax payable rises to £2,376 ((£18,000 x 33%) x 40%), representing only a 6% increase.

Although the tax payable on cars with lower emissions is still considerably lower than those with higher outputs, the increases set to take effect over the next few years will mean 'greener' company car drivers will experience steeper increases in the resulting tax payable.