Driving green – the tax benefits of low emission vehicles

Knowledge base from Boox

By Lynne Gowers on 4th December 2018

Driving green – the tax benefits of low emission vehicles

A growing number of UK drivers are choosing to reduce their carbon footprint by choosing a greener alternative to conventional petrol or diesel vehicles.

This trend isn’t just “driven” by environmental concerns. Drivers of so-called “ultra low emission vehicles” – ULEVs, receive a number of tax benefits which lower the cost of both private and business driving.

What is an ULEV?

The tax breaks we are going to look at apply to ULEVs – ultra low emission vehicles. These are usually defined as vehicles that emit less than 75g of carbon dioxide (CO2) for every kilometre travelled. They are typically powered, at least in part, by electricity.

Whether you are a private or business driver, making the switch to an ULEV lowers the cost of driving by way of a number of tax savings.

Tax benefits – all drivers

All drivers save on fuel duty, road tax and VAT:

Fuel duty

Fuel duty is levied on each litre of road fuel purchased (or each kilogram for gases). It is levied on combustible fuels, but not on electricity or on hydrogen used in a fuel cell.

Fuel duty rates 2018-19

Type of fuelRate
Petrol, diesel, biodiesel and bioethanol57.95p / litre
Liquified petroleum gas31.61p /kg
Natural gas used for vehicle fuel, eg. biogas24.7p / kg

Vehicle Excise Duty (VED)

VED is more commonly known as road tax. Zero emission cars, valued at less than £40,000, are exempt. Cars emitting less than 100g CO2 / km are are classed as zero emission.

For cars first registered on or after 1st March 2001 the rate of VED is based on CO2 emissions, with one rate payable in the first year and then a standard rate for all subsequent years.

You can calculate the road tax for your vehicle here

VAT

VAT is a consumption tax that applies to the price of vehicles, their fuels and electricity.

Plug-in electric vehicles charged at home only attract 5% VAT for domestic, non-business and charity use. This compares to the standard VAT rate of 20% for road fuels or electricity used for business, regardless of CO2 emissions.

Tax benefits – business users

As well as the savings above, companies and business drivers receive the following tax benefits for low emission commercial vehicles, including cars and vans.

Company car tax

The provision of a company car that is also available for private use is treated as a Benefit in Kind and is subject to company car tax.

This is calculated by multiplying the list price of the car by a fixed rate percentage based on CO2 emissions.

As the table below shows, from 2020/21 there will significant company car tax savings for drivers of low emission company vehicles.

Company car tax rates

CO2 emission (g/km)Zero emission mileage2018/192019/202020/21
013%16%2%
1-50>13013%16%2%
1-5070-12913%16%5%
1-5040-6913%16%8%
1-5030-3913%16%12%
1-50<3013%16%14%
51-5416%19%15%
55-5916%19%16%
60-6416%19%17%
65-6916%19%18%
70-7416%19%19%
7516%19%20%

Click here to find out more about company car tax, and company car benefits in general.

Salary sacrifice for the provision of Benefit in Kind

This offers an income tax saving for employees who accept an ULEV as a Benefit in Kind (BIK) under a salary sacrifice arrangement with their employer.

Reforms announced in the 2016 Autumn Statement removed the income tax and employer NIC advantages from salary sacrifice schemes, but ULEVs are exempt from these reforms because of their environmental benefits.

This means that the taxable value of the Benefit in Kind provided through salary sacrifice is fixed at either the amount of cash given up or the amount calculated under the existing BIK rules, whichever is higher.

Car and van fuel benefit charge

This a charge payable by employees who receive free fuel from their employer with a portion of it used for private mileage in a company vehicle and not repaid in full by the employee.

If the vehicle in question is a battery electrical car or van, there is no fuel benefit charge, because electricity is not a fuel. However the charge can apply to plug-in hybrid vehicles.

Workplace electric vehicle charging

As of 6th April 2018, electricity through workplace charging points for employees to charge their own electric vehicles is not taxed as a Benefit in Kind.

Van benefit charge

This charge is levied when an employer provides an employee with a van for private use. This charge is set at a flat rate: £3,350 for 2018/19. The employee pays income tax on this amount and the employer pays Employer’s NI.

For 2018/19 the van benefit charge for zero emission vans will be 40% of the main rate. This will increase incrementally until April 2022, when it will reach parity with the main rate.

Advisory fuel rates

Advisory fuel rates allow an employee to reimburse their employer for the cost of private mileage where the employer provides free fuel for their company car.

If you drive a petrol or diesel hybrid vehicle, the usual petrol and diesel advisory fuel rates can be used.

There is no advisory fuel rate for battery electric vehicles.

Enhanced capital allowances

Businesses that purchase cars which emit less than 75g CO2/km, zero emission goods vehicles, or ULEV recharging or refuelling infrastructure, are eligible for 100% first year allowance.
Approved mileage allowance payments

Approved mileage allowance rates are applied to employee-owned vehicles that are used for business travel. Electric and hybrid cars are treated in the same way as petrol and diesel cars.

View the rates here

Mileage allowance relief

An employee can apply for this if an employer does not fully reimburse an employee for the cost of business mileage in their own car.

For the purposes of mileage allowance relief, electric and hybrid cars are treated in the same way as petrol and diesel cars. Employees with electric cars are also entitled to apply for mileage allowance relief if they are not being reimbursed for their business mileage.

Make the switch

If the tax benefits of driving a low emission vehicle appeal to you, either as an individual or a business owner, maybe it’s time to see if green is your colour!

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