Company cars, are they tax efficient?
The common understanding regarding company cars was that they were both more tax efficient and cost efficient, than to buy the car privately.
But is this still the case?
In 2017 there have been some big changes to the way cars are taxed, both privately and through a business.
The first step is to understand how a company car effects the tax you pay, this is calculated on a number of variables as follows:
- Your personal tax band
- The P11d value of the car
- The CO2 emissions of the car
The general rule for company car tax is;
The lower the CO2 emissions + P11d value = the lower the company car tax
What's the P11d value?
The P11d value of the car is how much the car is worth after all other costs have been added to it. More specifically, the P11d value is calculated by taking;
- The makers list price
- The delivery charge
- Any other options you wanted added to the specification
- This includes thing such as a sat-nav, privacy glass etc.
- The VAT
And adding it altogether. If you’re wondering how to lower the P11d value then the only answer we can really give you is to go for a car that costs less money. Sorry!
To find out how much company car tax you will be paying you can either read below where we will explain how you can work it out yourself, or you can use a website such as comcar.
Thinking of a low emissions car...
From April 2017, there will be fifteen more bands introduced and eleven of these bands will apply to low-emission cars. These new bands mean that even if you have an electric car, you will have to pay company car tax.
There is one good thing though, and that is that ultra-low emission vehicles are exempt from this change. This means that they will be taxed in the current way regardless. Ultra-low emission vehicles are vehicles that emit 75g/km of CO2 or less.
On a salary sacrifice scheme?
There will also be changes to how salary sacrifice schemes are taxed. Currently, salary sacrifice schemes are taxed less, if at all, than their cash equivalent. This will no longer be the case. Things such as gym memberships, laptops and company cars, will be taxed the same as if you were given the cash equivalent. This means that you could be paying one of two amounts as company car tax; the BIK rate (as per normal), or as if you were given the money in cash.
Did you know...
For employees, there may be the opportunity to opt for a car allowance rather than a company car. The car allowance would be subject to income tax and national insurance as it is essentially additional salary.
The employee would then be able to claim a mileage allowance as set out above in respect of business mileage. This isn’t always the best option but, for some, could lead to significant savings.
As its stands the company can reimburse the individual the following amounts in respect of business mileage without any tax or NI consequences:
- On the first 10,000 business miles = 45p per mile
- Over 10,000 business miles = 25p per mile
Sole traders and partners can also use the mileage allowance in certain circumstances. The mileage rate covers the costs of buying, running and maintaining the vehicle, such as fuel, oil, servicing, repairs, insurance, vehicle excise duty and MOT. The rate also covers depreciation of the vehicle. Therefore, the actual costs and capital allowances cannot be claimed when the mileage allowance is used.
After taking into account the above tax free mileage allowances it may work out more tax efficient for the individual to acquire or lease their own vehicle and charge mileage to the company or business. However, it is necessary to prepare calculations of both routes in order to make that decision.
For business owners
One of the most common questions accountants are typically asked by small business owners is whether it is beneficial (from a tax perspective) to purchase or lease a car through the business, rather than personally.
The answer now very much depends on individual details and circumstances including the type of vehicle purchased, its list price, its CO2 emissions (as the above table has shown), whether the vehicle is to be purchased or leased and whether or not the business is incorporated.
If you purchase the car through the business then capital allowances will be due and these can be deducted in arriving at taxable profits. The level of capital allowances is also linked to the CO2 emissions of the car as follows:
- Emisssions not exceeding 75g/km = 100 % first year allowance
- Emissions not exceeding 130g/km = 18% writing down allowance per annum
- Emissions exceeding 130g/km = 8% writing down allowance per annum