This week we are looking at company cars and explaining how they are taxed on both the company and the individual.
When a car is made available to an employee, or member of his household, by an employer, he will be charged tax on the value of the car as an employment benefit if he also has private use of the car. It doesn’t matter how the company finances that car, it is still a benefit in kind to the employee.
The amount of tax the employee pays depends on:
- The list price of the car plus accessories (not the price the company paid for it), and
- Its CO2 emissions
each level of Co2 emission is given a percentage and you then multiply that percentage by the list price to give you the taxable benefit. This value is effectively “additional salary” on which you will pay income tax. Diesel car owners have a 3% supplement over petrol owners – this was due to be scrapped but will now remain until 2021. The percentages are set to increase by 2% each year, making company cars even more expensive in the future.
So, as an example, in 2016/17 my company provides me with a diesel car with a manufacturer’s list price of £30,000 and CO2 emissions of 165g/km. The appropriate percentage is 33%.
The benefit in kind is 33% x 30,000 = £9900. If I am a basic rate taxpayer, I will therefore pay £1,980 in income tax on this car in this tax year, and if I’m a higher rate taxpayer – £3,960.
If the company also pays for all my fuel (personal and business) there is a further tax charge. This is worked out by multiplying the same percentage by a fixed amount agreed for each year. For 16/17 the amount is £22,200 – so for my car above – the additional benefit is £7,326 and my tax bill £1,465 or £2,930. You need to do a fair few miles in your car to make this worth having!
For the company , they will pay class IA NIC on the value of the benefit, so each year they will pay 13.8% x 30,000 = £4,140 for my company car, though this and the running costs are tax deductible in the accounts.
So a company car is often not a cheap option and you should work out whether it is the right option for you.
Having a company van may be tax efficient than a company car as there is a fixed benefit of £3,170 – but there are strict rules about what is a van – and what is a car!
If the car is a genuine “pool car” then it can be provided tax free – but the qualifying conditions of being a pool car must be met. These are:
- Is used for business purposes and any private use of the car is incidental.
- Private use should account for no more than 5% of the car’s annual mileage on an irregular basis.
- The same car not used exclusively by one or two employees in a tax year.
- The car is not normally taken to an employee’s home at night.
HMRC will look at any pool car arrangement closely – and will expect mileage logs, written agreements, place for keys to be kept at work, employees personal cars etc so if you do think you have a pool car – make sure your records accurately detail its movements!