Sharon Gilkes: Tax implications of eco-friendly company cars

Whatever your thoughts about green driving a few years ago, chances are they’ll be more positive now.

Manufacturers have responded to demands from the public and from businesses to reduce carbon dioxide (CO2) emissions of cars. In the Budget 2013 on 20 March, the Chancellor announced plans for a new ultra low emission company car tax. As a result, there is a much wider and more attractive range available that meet the green car criteria, such as Audi, BMW and Ford, to name a few.

The demand has come from the fact that we, and policy makers, are more aware of the impact of emissions on the environment. Changes in the taxation of company cars, from April 2013, provide another compelling reason to reduce CO2 levels of a company fleet.

From April 2013, the threshold for CO2 emissions that car companies have in their fleet to qualify for full tax relief will drop from 160g/km to 130g/km. Cars in excess of the threshold face reductions in capital allowances available to the company and potential lease restrictions. A modest fleet of 50 vehicles could increase fleet costs by £25,000 per annum.

Whereas a mid-range diesel car with a list price of £25,000 could set you back £1,300 a year in tax, a greener option may cost just £500 a year in tax on a company car.

When many households are feeling financial pressures, it’s easy to see why employees are starting to be much more selective in the type of car they choose to drive. It is therefore essential that employers respond to these changes in taxation if they are going to remain competitive and attract and retain talent.

As well as financial benefits, reducing CO2 emissions decreases the level of harmful gases in our environment, resulting in a more positive place to live in. Political pressures also play a role. From April 2013, more than 1,000 companies listed on the London Stock Exchange will be required to measure their CO2 outputs and to summarise in their annual reports and accounts what actions they are taking to reduce their carbon footprint.

There is an increasing interest in organisations using salary sacrifice arrangements to provide cars to employees, regardless of whether it is a job requirement. The employee would give up an amount of gross pay for the car and would potentially pay a lower amount of tax on the company car benefit compared to their salary. This generates savings each year, while encouraging more green cars on the road.

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So, back to where we started. Have your thoughts on green cars changed? Eco-friendly cars and environmental benefits are an increasingly attractive option for employers. Not only can it support sustainability goals, enhance reputation and attract and motivate employees, there are also a range of financial and tax benefits emerging. Do you see the opportunity to save more money while having a positive impact on the environment?

Sharon Gilkes is associate director at Grant Thornton