Changes in car tax from April 2017
Drivers will need to take care if they buy a new car after 1 April 2017. Vehicle tax for the first year will be based on CO2 emissions. After the first year, the amount of tax that needs to be paid will depend on the type of vehicle.
The Vehicle Tax standard rates will be:
- £140 a year for petrol or diesel vehicles
- £130 a year for alternative fuel vehicles (hybrids, bioethanol and LPG)
- £0 a year for vehicles with zero CO2 emissions
Vehicle Tax on vehicles with a list price of £40,000 or more
However, if a vehicle has a list price (the published price before any discounts) of more than £40,000, the rate of tax is based on CO2 for the first year.
After the first year, the rate depends on the type of vehicle (petrol, diesel, alternative fuel or zero emissions) and an additional rate of £310 a year for the next 5 years.
After those 5 years, the vehicle will then be taxed at one of the standard rates (£140, £130, or £0, depending on vehicle type).
The changes won’t affect vehicles purchased before 1 April 2017, but for those considering a higher value purchase of more than £40,000, this may be an incentive to update your vehicle before the end of March 2017.
Tax-free mileage claims
Employees who use their own vehicle on business journeys for their employer are entitled to receive a mileage payment, tax-free, up to certain limits.
The current rates are:
- Cars and vans: 45p per mile for the first 10,000 business miles in a tax year, and then 25p per mile above 10,000 miles.
- Motorcycles: a flat rate of 24p per mile.
- Cycles: a flat rate of 20p per mile.
Employers can pay up to these rates and the employee claiming the expenses will pay no tax on claims received.
What if your employer pays less than these rates per mile?
In this case, employees can claim the difference on their tax return or by notifying HMRC. For example, if Joe uses his own car during 2016-17 for business purposes – drives a total of 2,000 miles and receives 20p per mile - his employer would have paid him £400. Joe could have received £900 (2,000 x 45p), so he can claim the unpaid £500 as an additional tax relief. This is called Mileage Allowance Relief.
What if your employer pays more than the published rates per mile?
The excess paid, above the published rates, will be treated as earnings and taxed accordingly.
Does your employer still pay for private fuel?
It is worth highlighting the cash benefit to company car drivers and their employers, of reimbursing the cost of fuel provided for private motoring. The rates have been updated for 2016-17.
Since the tax on private fuel provided with company cars is so high, many employers now have an arrangement whereby they no longer pay for private fuel. In this case, the employee must reimburse the employer for private fuel included in petrol bills paid by the employer. Otherwise, the employee may face a tax charge.
Consider the following example: If your private mileage is currently 560 miles a month, and you drive a 1900cc diesel engine car, the rate per mile to cover fuel charges, as quoted in the latest rates published by HMRC, is 11p per mile. Accordingly, you should repay £61.60 a month to your employer. Based on the above example, if the vehicle’s list price when new was £25,000, and the car benefit charge rate was 26% (based on a 130g/km CO2 rating) the benefit in kind charge for the year would be £6,500. With no repayment of private fuel, there would also be a £5,772 car fuel charge. Both these amounts would be added to your taxable income for the year. If you were a higher rate tax payer the car fuel charge would cost you £2,308.80 a year in additional tax (£5,772 x 40%). This amounts to £192.40 per month. If your actual private mileage proved, on average, to be 560 miles a month, you would therefore save £130.80 per month (£192.40 - £61.60).
Employers will also benefit as they will no longer be subject to a National Insurance charge on the amount of the car fuel benefit. In the above example, it would reduce NIC costs by £796.54 (£5,772 x 13.8%).
It is worth crunching the numbers. Obviously, the lower your private mileage, the more likely a repayment system will save you money, but you will need to take action before the 5 April 2017.
For more information and to organise a free initial consultation, get in touch with New Forest Tax Accountants, based in Queen Street Lymington.