Changes to the company car tax regime announced in last week's Budget will further strengthen the financial case for switching to lower-emission vehicles, according to industry experts.
Under the new rules, the vehicle emission threshold for determining company car tax rates is to be tightened by five grams per kilometre (g/km) from April 2011, ensuring that the basic threshold for the lower 15 per cent company car tax band will be reduced from 130g/km to 125g/km of CO2.
Chancellor Alistair Darling also said that the company car tax system will be overhauled from 2012/13 in an attempt to incentivise firms to use only the greenest vehicles available in their fleets.
Currently, cars emitting 120g/km of CO2 qualify for the lowest 10 per cent tax band, but from 2012 the threshold is expected to be lowered to 100g/km, while a new banding system will ensure taxes rise by one percentage point for every five g/km rise in carbon emissions.
In addition, the car tax discount for alternative fuel vehicles such as hybrids and flex-fuel cars will be scrapped from 2011 on all vehicles except electric cars.
Patrick King of accountancy firm McIntyre Hudson said that the changes were likely to further bolster demand for the most fuel efficient cars on the market. "Everyone with a company car is very aware of what band it is in," he said. " People are generally moving towards diesel and low-emission vehicles as [company car tax] does hit drivers of higher emission cars quite hard in the pocket."
A spokesman for fleet operator trade association ACFO agreed the changes would further accelerate the switch to lower-emission vehicles. "The lower the CO2 emissions the more cost-effective the car is from both a corporate and a driver perspective," he said.
"Broadly speaking, anything under the average of 160g/km is going to save you money and that is absolutely driving fleet operators' interest in lower-emission cars - the basic rule is, if you want to cut fleet costs then switch to lower emission cars."
According to recently released figures from contract hire and leasing company ALD Automotive, which operates a fleet of 50,000 vehicles, average CO2 emissions of new company cars added to its fleet dropped from 155.8 g/km in 2007 to a record of 150.6 g/km last year, largely as a result of the lower tax rates on offer for greener cars.
In a further boost to manufacturers of fuel-efficient vehicles, the Budget confirmed that new road tax banding announced last November will take effect from next month, ensuring that vehicles with carbon emissions of under 100g/km will pay no vehicle excise duty and those with emissions of between 101 and 120g/km will pay just £35 a year.
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