Fleets are being advised to prioritise a shift to lower emitting vehicles to avoid potential cost increases from leasing companies caused by new capital allowance rates.

Experts believe that leasing rates for vehicles in certain emission bands could rise by up to £50 a month as a result of the changes, which came into effect this month.

Capital allowances allow companies to offset a proportion of the value of a vehicle against their tax bill each year to reduce their business costs.

The key CO2 emission band has until recently been 160g/km, above which companies can only claim 8% capital allowances if they purchase vehicles, but below which the rate more than doubles to 18%.

From April, the critical cut-off point for increased capital allowances has been slashed from 160g/km to 130g/km.

Leasing companies which purchase vehicles to lease to customers will have to factor these costs into their calculations. This means leasing rates could rise for customers that haven’t adapted their vehicle order CO2 strategy to reflect the new emissions limit.

According to a recent survey by LeasePlan Go, 48% of senior managers with fleet responsibility say their business is not prepared for the changes.

Members of the Fleet News Fleet200, a community of Britain’s largest fleets, heard during a recent meeting that lost tax relief on vehicles emitting between 131g/km and 160g/km equated to thousands of pounds per year per vehicle.

For example, according to Dan Rees, senior manager with Deloitte, a BMW 530d with a P11d price of £43,000 and emissions of 145g/km would lose more than £1,200 in capital allowances as a result of the tax change, leading to a potential cost increase of £33 a month.

Across a fleet of 250 cars, this lost tax relief equates to more than £400,000 a year.

In addition, fleets which lease vehicles are also directly affected because they will be able to offset less of the monthly rental for the vehicle against their own tax bills.

Fleets which lease vehicles that emit more than 130g/km can only claim tax relief for 85% of the lease cost of the vehicle under lease rental restrictions, compared to 100% for vehicles under the threshold.

Rees said: “Expect lessors to raise their rental rates to cover the increased cost of ownership. With the lease rental restriction there will also be a cost increase.”

For the same BMW 530d, the disallowed tax relief on a lease rental would be equivalent to £985 a year, indicating a potential cost increase of around £50 a month, or £150,000 a year for a 250-car fleet.

The rate change is the second half of a major shift in capital allowance taxation that comes into effect this month.

In the second change, which took effect on April 1, the emissions threshold at which company cars are eligible for 100% first year write-down allowances has been slashed from 110g/km to 95g/km and leasing companies will no longer be eligible to claim it on low emission cars they acquire and subsequently lease to fleets. Instead, their tax relief is be set at the 18% main rate.

However, it is likely that the number of orders affected in this band will be much lower than those falling into the 131g/km–160g/km band, which covers the core of many fleet models.

Graham Thompson, general manager of FN50 leasing firm Agnews, said: “Unfortunately due to these changes to capital allowance thresholds, vehicles emitting between 95-110g/km and 130-160g/km will have an approximate rental increase anywhere between £10 to £15 per month depending on the P11d price of the vehicle.

“This is because they have either jumped from a low to a mid-CO2 vehicle or from a mid to a high-CO2 vehicle respectively.”

Matt Dyer, commercial director of LeasePlan, added: “We are seeing a renewed appetite among fleets to carry out policy benchmarking to ensure that everything that can be done is done and we expect a renewed focus for leasing companies to take the strategic lead with their clients’ fleets.”