Major changes to the taxation of company cars

From April 2002, the existing income tax charge based on 35 per cent of the car’s price, subject to business mileage and age-related discounts, is to be abolished. This will be replaced by a charge on a percentage of the car’s price graduated according to the level of the car’s carbon dioxide emissions.

The reforms to the taxation of company cars are intended to remove incentives to drive unnecessary extra business miles, to give company car drivers and their employers a tax incentive to choose more fuel efficient cars, and to encourage manufacturers to produce cars with lower carbon dioxide emissions.

The Chancellor’s decision follows a review of how the company car tax regime might be altered to send better environmental signals to drivers, employers and manufacturers.

The Inland Revenue will be undertaking further consultation on the precise details of the links between carbon dioxide, other emissions and the tax, with a view to bringing forward legislation in the 2000 Finance Bill.

To pave the way for this reform, the Chancellor has also announced reductions in the existing business mileage, age related and second car discounts to take effect from 6 April 1999.

There will be no increase in the full tax charge on a company car, which will remain at 35 per cent. There will also be increases in the fuel scale charges for company cars, in line with the programme announced in 1998’s Budget. This charge will apply when a company car driver drives less than 2,500 business miles in the car in the tax year. Where a company car driver drives 2,500 to 17,999 business miles in the car in the tax year, the tax charge will be 25 per cent of the price of the car.

Where a company car driver drives 18,000 or more business miles in the car in the tax year, Brown proposes a tax charge on 15 per cent of the price of the car.

From 2002-03, the charge on the benefit of a company car will be graduated according to carbon dioxide emissions, and none of the discounts mentioned below will apply.

The tax charge, after taking into account business miles, will be further reduced by one quarter, rather than one third, if the car is four or more years old at the end of the tax year.

Generally, second cars will be taxed on 35 per cent of the price of the car each year. If the second car is also used for at least 18,000 business miles a year, the charge will be reduced to 25 per cent.

These increases in company car tax are expected to yield £270 million in 1999-2000, £265 million in 2000-01 and £260 million in 2001-02.