Tax Advice when Purchasing a Company Car

 

Company Car Tax – The FD Analytical Guide

FD ANALYTICAL – CHARTERED MANAGEMENT ACCOUNTANTS

Email: Enquiries@FDAnalytical.com     Tel: 0800 49 68 666     Web: FDAnalytical.com

The subjects of company cars and company car tax are two of the most common areas of confusion and questions, which is hardly surprising – it is reported that almost 1 million people within the UK receive a company car benefit from their company or employer.

Here is the FD Analytical quick guide to company car tax, and don’t forget our top tips at the end of this article. If there are any areas that you require further information on, that are not covered within this guide, please feel free to contact us via FDAnalytical.com and we’ll happily answer your questions.

My employer has offer me a company car – what will I actually receive?

Generally, when your employer or company provides you with a company car this includes the following:

  1. The company car – don’t forget to check the vehicle type
  2. Full maintenance and repair costs to the vehicle
  3. Full vehicle servicing
  4. Insurance cover – don’t forget to check who is insured; partner, close family etc.

Company car packages can and do differ, so always confirm the exact details.

In summary, the benefit is; a vehicle, fully insured, with all maintenance, repair and servicing costs included – you can understand why the benefit is so attractive.

What is company car tax and why does it exist?

Company cars are classified as a “benefit in kind”, which is a benefit that your employer or company gives to you. Benefits in kind can take a huge number of different forms including; private medical insurance, life insurance, and many others, for this guide we’ll focus on the benefit of your employer giving you a company car.

The tax charge on a benefit in kind is normally pretty straightforward to calculate, you find out how much the annual benefit is worth and this amount is added to your salary as if it were an additional payment, then, you’re taxed on it as normal – simple.

For example; If your annual salary was £45,000 per year and you received personal health insurance as a benefit in kind which cost the company £375 per year, your annual taxable income would be £45,375 – as a result you would be taxed on the £375 as if it was just another wage or salary payment.

Company cars are slightly different, and a little more complicated in terms of calculating how much of a benefit is actually received when the employee receives a car. email: Enquiries@FDAnalytical.com Tel: 0800 49 68 666 Web: FDAnalytical.comFD ANALYTICAL – CHARTERED MANAGEMENT ACCOUNTANTS

How much tax do I pay and how is it calculated?

Company cars are taxed on their annual value, that is, how much is the car worth, as a benefit to the employee each year and this amount is calculated using three elements; The…….

  1. List price of the car
  2. CO2 emission levels
  3. Employees tax band

Let’s take a look at each part…..

List Price

The list price of the car is fairly straight forward, but beware, this is not what was actually paid for the car, it is the list price of the car and this must include any upgrades or additional specifications such as upgraded alloy wheels, a bespoke vehicle colour or improved sound systems.

All of these elements add to the list price (and therefore your tax charge)

Also BEWARE, if a used car is purchased, the original list price of the vehicle is used, even if this price is a million miles away from what was actually paid for the car – this is one reason why company cars tend to be brand new and not used!!!

CO2 emission levels

The CO2 emission level is slightly more complicated. In an effort to try and reduce carbon emissions the UK taxman charges less tax, the more efficient that a vehicle is.

So how is this calculated? Well, depending upon the CO2 emissions of a vehicle, HMRC allocates the vehicle a % which, for the 2016/17 tax year is between 7% and 37%

For a really inefficient, “gas guzzler” the percentage would be close to 37%, for a sleek, efficient, environmentally friendly model, the percentage could be towards the 7% level. The percentage CO2 emission level is really important, as the % multiplied by the list price of the vehicle is how the annual benefit of the car is calculated – the amount on which you are going to be taxed.

A full official list of CO2 emission rates can be found at:

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/532303/TC2b.pdf

Tax banding and rates

Current UK income tax bands are 0%, 20%, 40% and 45%

Your (company car) benefit in kind will, effectively, be taxed at the same rate as your highest level of income.

The Calculation – some examples

Example One

Mr Jones is offered a company car by his employer – the car is a BMW X5.

After some investigation Mr Jones learns that the list price of the vehicle is £65,000 – his employer has also kindly added a sports pack to the vehicle, which is valued at £2,000 taking the overall list price to £67,00

The CO2 emissions level of the vehicle is 225 which equals a CO2 percentage rate of 37%

The annual benefit in kind value of the vehicle is: £24,790 (37% x (£65,000 + £2,000))

Mr Jones is a higher rate tax payer at 40%.

The annual tax that Mr Jones will pay as a result of having this benefit will be: £9,916 (or £826 / month).

Example Two

Mr Green has been offered a Toyota Aygo vehicle with a list price of £13,000

This car has a small engine and is pretty efficient, as a result the CO2 % is 11%

The annual benefit in kind for this vehicle is: £1,430 (£13,000 x 11%)

Mr Green is a basic rate tax payer, paying 20% rate of tax, as a result the annual tax charge will be: £286 (or £23.83 / month.

Although the above are two very extreme examples you can see the huge difference between the tax liabilities on each vehicle, which is why it is so very important to initially select an appropriate vehicle and fully understand the additional tax charge.

As you have probably grasped already, a relatively cheap, energy efficient car will attract the least amount of annual benefit and therefore the lower amount of tax.

How do I pay the extra tax – do I have to complete a self-assessment tax return?

A self-assessment tax return is not specifically required as a result of having a company car, HMRC are informed that you have a company car by your employer completing a form called a P46 (car) it can take up to 3 months for HMRC to process this, but once complete, HMRC will issue you with a revised tax code – once applied this will lead to your employer taking an increased amount of tax from you each pay date.

FD Analytical – Our Top Tips

Petrol cars are normally more tax efficient than Diesel vehicles (by around 3%) therefore, where a choice of fuel types are available this may be worth looking into – BUT, if you are a high mileage driver balance the reduction in tax charge off against the increase mileage efficiency received from a diesel vehicle.

Beware of “added extras” to your company car when you first take it, your boss may think that he is rewarding you by adding a “sports pack” or 21 inch alloy wheels to your vehicle, but this will all equal added tax for you, so consider taking the “standard” model of your vehicle.

Consider taking a car allowance from your employer rather than a company car itself, in other words “take the money” – this means that you can purchase or lease your own vehicle and charge your company £0.45 / mile for each and every business mile that you complete (£0.45 / mile up to 10,000 miles per annum, £0.25 / mile over and above this level).

The current company car tax regime, makes less expensive, smaller engine, petrol vehicles significantly more tax efficient, so wherever possible consider these options.

Company car tax rates are subject to change, depending on the particular government and their views on “green policies”, so be sure to consider the impact of such changes on your tax liabilities. Accepting a company car is normally a 2 – 3 year commitment, so wherever possible try to plan 2-3 years ahead.

In Summary

From our experience taking on a company car is a medium term commitment and is very rarely something that individuals take tax advice on before accepting, like any other areas of tax, this commitment should be reviewed and all options explored to help ensure that your position is as tax efficient as possible.

FD Analytical provide specialist company car tax appraisals for employees and directors of limited companies, that clearly highlights how much tax is payable, and could be saved, by selecting different options of company cars.

This company car tax appraisal costs just £95.00 and could save you a significant amount of money.

FD ANALYTICAL – CHARTERED MANAGEMENT ACCOUNTANTS

Email: Enquiries@FDAnalytical.com     Tel: 0800 49 68 666     Web: FDAnalytical.com

For further information or to order a company car tax appraisal, contact us at: www.FDAnalytical.com All information contained within this guide is for illustrative purposes only, before taking any action based upon the contents of this guide consult a financial or tax specialist such as FD Analytical.