Electric Company Cars
For 2020/21, it was possible to enjoy an electric company car as a tax-free benefit. While this will no longer be the case for 2021/22, electric and low emission cars remain a tax-efficient benefit.
How are electric cars taxed?
Under the company car tax rules, a taxable benefit arises in respect of the private use of that car. The taxable amount (the cash equivalent value) is the ‘appropriate percentage’ of the list price of the car and optional accessories, after deducting any capital contribution made by the employee up to a maximum of £5,000. The amount is proportionately reduced where the car is not available throughout the tax year, and is further reduced to reflect any contributions required for private use.
The appropriate percentage
The appropriate percentage depends on the level of the car’s CO2 emissions. For zero emission cars, regardless of whether the car was first registered on or after 6 April 2020 or before that date, the appropriate percentage for electric cars is 1% for 2021/22. For 2020/21 it was set at 0%.
This means that the tax cost of an electric company car, as illustrated by the following example, remains low in 2021/22.
Example
Jaz has an electric company car with a list price of £30,000. The car was first registered on 1 April 2020.
For 2020/21, the appropriate percentage for an electric car was 0%, meaning that Jaz was able to enjoy the benefit of the private use of the car tax-free.
For 2021/22, the appropriate percentage is 1%. Consequently, the taxable amount is £300 (1% of £30,000).
If Jaz is a higher rate taxpayer, he will only pay tax of £120 on the benefit of his company car. If he is a basic rate taxpayer, he will pay £60 in tax. This is a very good deal.
His employer will also pay Class 1A National Insurance of £41.40 (£300 @ 13.8%).
For 2022/23 the appropriate percentage will increase to 2%.
Low emission cars
If an electric car is not for you, it is still possible to have a tax efficient company car by choosing a low emission model.
The way in which CO2 emissions are measured changed from 6 April 2020. For 2020/21 and 2021/22, the appropriate percentage also depends on the date on which the car was first registered as well as its CO2 emissions. For low emission cars within the 1—50g/km band, there is a further factor to take into account – the car’s electric range (or zero emission mileage). This is the distance that the car can travel on a single charge.
The following table shows the appropriate percentages applying for low emission cars for 2021/22.
Appropriate percentage for 2021/22 for cars with CO2 emissions of 1—50g/km | ||
Electric range | Cars first registered before 6 April 2020 | Cars first registered on or after 6 April 2020 |
More than 130 miles | 2% | 1% |
70—129 miles | 5% | 4% |
40—69 miles | 8% | 7% |
30 – 39 miles | 12% | 11% |
Less than 30 miles | 14% | 13% |
As seen from the table, choosing a car with a good electric range can dramatically reduce the tax charge. Assuming a list price of £30,000, the taxable amount for a car first registered on or after 6 April 2020 with an electric range of at least 130 miles is £300 (£30,000 @ 1%); by contrast, the taxable amount for a car with the same list price first registered before 6 April 2020 with an electric range of less than 30 miles is £4,200 (£30,000 @ 14%).
The moral here is to choose a new greener model and you will be rewarded with a lower tax bill.
Time to pay
As part of the Chancellor’s Coronavirus support package taxpayers were permitted to defer payment of the July 2020 income tax Payment on Account instalment until 31 January 2021. However, three lockdowns later and HMRC have become increasingly aware that a large number of taxpayers are still needing to delay not only that payment but also the tax payments that would normally be due on 31 January 2021 namely:
- the balancing income tax payment for 2019/20,
- the first income tax payment on account for 2020/21,
- any capital gains tax for 2019/20 and
- classes 2 and 4 NIC for 2019/20.
Therefore HMRC have set up a method by which further deferment may be applied for online, separate from their usual ‘Time to Pay’ arrangements facility. Taxpayers unable to pay their tax bills would normally need to call HMRC to discuss a payment plan but this method of applying online makes the process easier.
To use this automatic process the taxpayer needs to set up a Government Gateway account and agree to pay the tax in monthly instalments by direct debit, with the aim of clearing the debt within 12 months. Other conditions include:
- the 2019/20 tax return must have already been submitted,
- the submission of all tax returns must be up to date,
- the debt must be of at least £32 but less than £30,000 and,
- no other tax instalment plans must be in place (i.e. under the usual “Time to Pay” arrangements).
Although payments are expected to be made monthly the system does allow flexibility such that the taxpayer can make additional payments should circumstances allow. However, should the arrangement need to be amended later then HMRC will need to be contacted by phone to discuss revised arrangements. The instalment plan must be set up no later than 60 days after the due date for the tax, which realistically means that it needs to be in place by 31 March 2021. All the late paid tax will accrue interest at 2.6% to the date of full repayment.
Should the taxpayer not keep to the arrangement and fall behind with the payments then HMRC has the right to ask for the outstanding amount to be repaid in full.
The facility may be a lifeline for many but it should be noted that care needs to be taken should the application include deferment of class 2 NIC due for 2019/20. The rules covering NIC payments mean that if this NIC is not paid by 31 January 2021, then the year will not count as a completed year in the taxpayer’s NIC record for state pension purposes.
Care also needs to be taken as to when to apply. Tax return submissions normally take up to 72 hours to be processed. Therefore, should the taxpayer apply at the same time as submitting their return for example, then the application may be rejected.
Should the total tax debt be more than £30,000 or the 31 March 2021 deadline is missed then the taxpayer cannot take advantage of this online facility and must go through the normal ‘Time to Pay’ process. There is also no specific online facility for corporation tax payments and as such the general ‘Time to Pay’ arrangements will need to be sought. However, it would appear that HMRC are being flexible with these arrangements and in some cases are agreeing to three months interest free extensions on payment dates.
Unused residential finance cost
Since 2017/18, the amount of income tax relief that landlords with residential properties have been able to claim on residential property finance costs (e.g. mortgage interest) has gradually been restricted such that for the year 2020/21 the restriction is now given as a tax reducer at the basic rate of tax (i.e. 20%). Loans that are wholly for commercial properties, land and property dealing or development businesses or properties used for a furnished holiday letting business are not affected.
Landlords affected by this restriction may have noticed a box on the 2020 tax return as being Box 45 – Unused residential finance costs brought forward.
Completion of this box records the amount of interest that has not been utilised in one year to be carried forward and to the finance costs figure of the following year. The tax reduction for that following year is then calculated using both the amount brought forward and the current year’s finance costs. The tax reduction applies to each property business separately such that any ‘excess’ tax reduction on an overseas property business cannot be used against a UK property business or share of partnership property business or vice versa. If the property has made a loss then no tax deduction will be given either and the unused finance cost amount for that year will be carried forward and utilised in the following year’s calculations. The tax reduction cannot be used to create a tax refund.
Calculating the amount of restriction to be applied can be complicated in some circumstances. The amount to claim is the lower of the finance costs incurred, the profits of the property business (less losses brought forward) and the taxpayer’s total taxable income (after deduction of the personal allowance but ignoring savings and dividend income). This restriction may result in an amount being disallowed, therefore the amount not used is carried forward to be utilised in any following year and recorded in box 45.
Basic Example:
Tax year 2019 – 2020
Employment before tax = £40,000
Rental income = £21,000
Other expenses = £(8,000)
Property profits = £13,000
Finance costs = £14,000 (£3,500 allowable against rental income – 25%)
Taxable income = £49,500 (£40,000 + £13,000 – £3,500)
Income Tax calculation:
£49,500 less personal allowance (£12,500) = £37,000
Tax due: (£37,000 x 20%) £7,400
Finance cost tax reduction calculated
on property profits (£9,500 x 20%) £ (900)
Final Income Tax = £5,500
The tax reduction is calculated as 20% of the lower of:
- finance costs = £14,000
- property profits = £9,500
- adjusted total income (exceeding personal allowance) = £49,500
The lowest figure is property profits, so £9,500 x 20% = £900 tax reduction. £1,000 finance costs (£10,500 – £9,500) that have not been used are shown in box 45 and carried forward being added to the finance costs for that year and then the total amount restricted accordingly.
If a landlord has brought forward amounts of restricted finance costs from earlier years and has receipts from their property business of £1,000 or less then they have the choice of either claiming expenses and using the reducer calculation in the normal way or claiming the Property Income Allowance (PIM) tax exemption. If they choose the PIM route then the restricted finance costs figure is carried forward to be used in any future years’ income tax liability calculation. Individuals can decide on a year by year basis which approach to take.
The ability to carry forward unused finance costs will be beneficial to those landlords with a temporary reduction in property income possibly because a property is vacant for a period or a short-term increase in costs (e.g. due to refurbishment).
Self-employment and the £2,000 Dividends allowance
All taxpayers, regardless of the rate at which they pay tax, are entitled to a tax-free allowance for dividends. For 2020/21 this is set at £2,000, so if you’re thinking of branching out to be self-employed or have made the switch last year, this is what you need to consider.
Nature of the allowance
If you’re self-employed and own your limited company, you can take money out of your company as a dividend, or you may receive a dividend payment if you own company shares.
Although termed the ‘dividend allowance’ it is in fact a zero rate band. Dividends covered by the allowance are taxed at a zero rate of tax, but count towards band earnings.
Where the personal allowance has not been otherwise utilised, dividends sheltered by the personal allowance are also received free of tax.
Dividends not covered by the allowance
Where dividends are not sheltered by either the dividend allowance or the personal allowance, they are taxable at the dividend rates of tax. Where the taxpayer has different sources of income, dividends are treated as the top slice of income. For 2020/21, dividend income is taxed at 7.5% to the extent that it falls within the basic rate band, at 32.5% to the extent that it falls within the higher rate band and at 38.1% to the extent that it falls within the additional rate band.
Using the 2020/21 allowance
The dividend allowance is lost if it is not used in the tax year. As the end of the 2020/21 tax year approaches, it is sensible to review your dividend policy and consider whether it desirable, and indeed possible, to pay further dividends before the 2020/21 tax year comes to an end on 5 April 2021.
Where an individual receives dividends both from their investments and their family or personal company, depending on their shareholdings, their dividend income may have fallen in 2020/21 as a result of the Covid-19 pandemic. This may provide the scope to pay higher dividends than normal from the family or personal company in order to utilise the allowance.
However, remember that dividends can only be paid from retained earnings.
Where profits are low for example if you have just started a business, or a loss has been made in 2020/21 as a result of the pandemic, this does not necessarily prohibit the payment of dividends – dividends can be paid as long as retained profits brought forward are sufficient to cover both any loss and any dividends paid out.
To comply with company law requirements, dividends must be paid in accordance with shareholdings. However, using an alphabet share structure (such that one shareholder has A class share, another has B class shares, and so on) overcomes this restriction and allows dividend payments to be tailored to utilise family members’ unused dividend (and indeed personal) allowances for 2020/21.