Everything you need to know about hybrid company car tax
Already familiar to fleets, hybrids can be just as effective at cutting your tax bills as reducing your carbon footprint
The UK government has set out its ambitions for 100% of cars to be electric from 2035, but there’s still value in the middle ground.
Hybrids combine the efficiency of an electric motor with the long-range flexibility of a combustion engine, and they’ve been helping save businesses money for a long time, since the first models arrived more than 20 years ago. And although incentives have waned a little recently, hybrids can be an effective route to keeping your tax bills low.
*How do you calculate hybrid company car tax?*
As with any other workplace perk, a vehicle that's owned or leased by a company and available for private journeys is classed as a taxable benefit-in-kind (BIK). Since 2002, the amount drivers pay has been heavily influenced by their car’s CO2 emissions, which has made businesses an early adopter of hybrids, as they have escaped some of the eco penalties recently levied on diesel cars.
The foundation is what’s called the ‘taxable value’ – a percentage of the car’s list price (or P11D value) weighted based on its CO2 emissions. It has created a sizeable gap between traditional hybrids (such as the Toyota Prius) and the growing selection of plug-in hybrids (PHEVs), which offer a much longer electric-only range and significantly lower official CO2 emissions and fall into lower bands as a result.
*Autocar's company car tax calculator shows exactly what you will pay for every make and model*
The company car tax bands were revised last year, introducing new low rates for vehicles with CO2 emissions of 50g/km or less (which covers the majority of PHEVs) and differentiating between them based on their electric-only ranges.
For most current PHEVs, the taxable value is usually either 7% or 11% of the list price, compared with 24% or higher for a petrol or diesel car, so the taxable value is much lower, too.
BIK is a percentage of that taxable value based on your income tax rate. England, Wales and Northern Ireland have three tiers (20%, 40% and 45%), while Scotland has a five-tier system between 19% and 46%. So a driver paying 20% income tax would be liable for 20% of the taxable value each year, typically split into 12 monthly instalments and collected from their monthly wages.
*What incentives are available for businesses to use hybrids?*
With strong incentives and no range anxiety, hybrids (particularly PHEVs) have been a popular first step towards electrification for company car drivers. However, they can also benefit fleet operators.
Employers pay Class 1A National Insurance Contributions (NICs) for providing workplace perks. For cars, this is a flat rate of 13.8% (rising to 15.05% in April 2022) of the vehicle’s taxable value, which means it’s just as heavily CO2-weighted as BIK tax for drivers. Some examples are shown below.
Businesses with vehicles emitting 50g/km CO2 or less can also deduct 100% of the monthly lease cost or 18% of the purchase cost against pre-tax profits. Above that threshold, it falls to 85% and 6% respectively. All hybrids also qualify for a £10 reduction in Vehicle Excise Duty (VED, or road tax) but attract the full luxury car levy – currently £335 – if the list price is £40,000 or more. This applies during the first five annual renewals, which can make them more expensive to tax than a petrol or diesel model, as shown below.
*Alex Grant*