How the company car is changing

Since its birth amidst the pay freeze of the early 1970s, the company car has become a popular choice with British drivers. Around a million employees now take a company car as part of their remuneration package.

However, the last few years have seen a number of legislative changes to the way company cars are taxed, with significant implications for employers and employees alike.

Rising Company Car Tax rates

Company Car Tax (CCT) is levied on a proportion of the list price of the car. That proportion – known as the ‘appropriate percentage’ – depends on the car’s carbon dioxide (CO2) emissions.

In recent years, the Government has been steadily increasing these appropriate percentages, and hence the amount of tax that company car drivers have to pay. And it’s not done yet.

As the table below shows, the appropriate percentages are set to rise by three percentage points next year and (for most cars) by another point the year after.

New Company Car Tax bands

The table above also illustrates another change to CCT – one announced by the Chancellor at Autumn Statement 2016 and due to take effect in 2020-21. The stated aim of the change is to incentivise the uptake of ultra-low emission vehicles (ULEVs).

At the moment, cars with CO2 emissions of less than 95g/km are split into three bands for CCT: those with emissions below 50g/km face an appropriate percentage of 13%; those with emissions between 51 and 75g/km face an appropriate percentage of 16%; and those with emissions between 76 and 94g/km face an appropriate percentage of 19%.

The new system will divide these cars up into many more bands, with appropriate percentages ranging from 2% for zero-emission cars to 23% for those with emissions between 90 and 94g CO2/km. For cars with emissions between 1 and 50g/km, their appropriate percentage will be between 2% and 14%, depending on the number of zero-emission miles they can travel.

Tax changes for Optional Remuneration Arrangement

On top of these changes to CCT, last April saw new legislation come into force that changes the way many company cars are taxed.

Most employees taking their cars through Optional Remuneration Arrangements (either salary sacrifice or cash alternative schemes) now have to pay Income Tax on the amount of income they forego or the value of the car – whichever is greater. And their employer has to pay National Insurance Contributions on it too.

However, arrangements that were in place before 6 April 2017 won’t be affected until 2021, and ULEVs have been exempted from the changes altogether. In addition, HMRC has clarified that, for tax purposes, the amount of salary sacrificed only includes the amount used to actually finance the car. The other costs – maintenance, insurance, road tax, etc. – are not included.

What these changes mean for you

One of the main attractions of company cars is the tax advantages they can bring. However, the changes described above have reduced these advantages – dramatically so in some cases.

If organisations do nothing, the costs associated with their company cars will inevitably rise, by up to 5% over a car renewal cycle. Standing still is no longer an option, especially given the other ongoing changes around technology, autonomy and electrification.

So, what should fleets do?

Organisations should regularly review and update their fleet policies to ensure that they are offering employees the best vehicles in each class. Drivers should be segmented by mileage and operational requirements so that solutions can be tailored to their needs. And, for the long term, fleets should build a framework to future-proof policy decisions against changes in legislation and the market.

You’ll always need your staff to travel, and offering the right driving solutions can have a huge impact on employee attraction and engagement.

We at Hitachi Capital Vehicle Solutions have been working to develop a framework of solutions to meet every organisation’s travel and mobility requirements – taking into account both the demands of your work and the needs of your employees.

Why not speak to one of our experienced Fleet Consultants to find out how we can help you to optimise your fleet policy for both your organisation and your employees? Please get in touch using the contact form below.