Company Car Tax Efficient Guide

It can be confusing whether or not to introduce company cars into your business. Equally confusing can be what company car tax employees should then pay on the specific car models. In this article we look at company car taxes from a business perspective and also that of the employee ie. an individual provided a company car for private use (which includes commuting).

There are essentially three main tax efficient areas to consider when making the decision to add company cars to a business: –

1. Reduce Corporation Tax via Capital Allowances – principally affecting the business
2. Reduce Value Added Tax (VAT) – principally affecting the business
3. Reduce personal taxation via Benefits In Kind – principally affecting the employee

For the purposes of this article we are assuming that your business is a limited company. If you are a sole trader or partnership there may be some differences as to the tax treatment to the cars used by the business owners.

For employees; you cannot claim capital allowances for cars, bicycles or motorbikes which you use for work purposes. However you may be able to claim for fuel costs and business mileage.

For businesses; Capital allowances can be claimed on cars you purchase and use in your business. This means part of the value of the car can be deducted from your business’ profits before paying tax. You can use ‘writing down allowances’ to work out what you can claim. Note that cars do not qualify for Annual Investment Allowance (AIA), however, sometimes there can be 100% available for very low emission cars or battery cars but check if it is still available and applicable before purchasing.

The rate you can claim depends on the CO2 emissions of your car and the date you bought it. If you’re claiming writing down allowances, group items into pools depending on which rate they qualify for. The 3 types of pool are the:

• main pool with a rate of 18%
• special rate pool with a rate of 8%
• single asset pools with a rate of 18% or 8% depending on the item

You can add items you’ve claimed as ‘annual investment allowance (AIA)’ or ‘first year allowances’ into the pool they qualify for. The value you add for them is zero. For first year allowances you don’t pool them until the year after you claim for them.

The main and special rates apply from 1 April for limited companies, and 6 April for sole traders and partners. The first year allowances rate applies from 1 April for all businesses.

You can move the balance of any cars bought before April 2009 to your main rate allowances pool.

If your car doesn’t have an emissions figure use the special rate – use the main rate if it was registered before 1 March 2001.

If you’re a sole trader or partner and you also use your car outside your business, calculate how much you can claim based on the amount of business use.

If your business provides a car for an employee or director you can claim capital allowances on the full cost. You may need to report it as a benefit if they use it personally.

For businesses; do not assume that you can reclaim 100% of the VAT paid when purchasing a new car. However, if you use the vehicle for a taxi, self-drive hire or driving instruction you can usually claim 100%, as the rule is that the vehicle must be 100% for business purposes therefore, a pool car can often qualify.

If the car is a lease car, 50% of the VAT can usually be reclaimed.

Ensure that you consult with your accountant or tax advisor to assess how much VAT you can reclaim.

For employees; If your employer provides you with a company car it is considered as a Benefit In Kind (BIK) which you receive on top of your salary – and as such subject to tax (both personal Income Tax and Class 1a National Insurance for the business).

BIK is charged at a rate from 5% to 37% of the list price of the vehicle, depending on it’s CO2 output – see chart below. Therefore you may find that an expensive company car with high emissions may not be so attractive. Also note, that the BIK is calculated on the list price, so purchasing second-hand company cars may not be suitable.

Company car tax bands are not to be confused with Vehicle Excise Duty (VED) car tax bands, or ‘road tax’.

The company car tax rate is broadly determined by its carbon dioxide (CO2) emissions, categories into bands and a corresponding percentage applied to the car’s P11D value. The P11D value of the car includes its Recommended Retail Price (RRP), VAT and any optional extras such as sat nav, cruise control, parking sensors etc. However, this does not include non-taxable items such as the original registration fee and 1st year’s road tax. The P11D value can be reduced if you pay something upfront towards the cost of the car or you only have the car part-time.

The following are also taken into account:

• capital contributions by the employee to the cost of the car or accessories
• for years to 2010/11 only, the price (net of capital contributions) is subject to a maximum; no limit is applied from 2011/12 onwards
• periods when the car is unavailable
• payments by the employee for private use of the car
• if the car is a classic car some rules are modified
• periods when the car is shared

The benefit is calculated afresh for each tax year because any of the constituents taken into account in the calculation can change.

Diesel fuel cars currently have a 3% surcharge compared to petrol models with similar emissions. This is because they emit greater amounts of harmful particulates. So to make up for the initial higher cost of a diesel powered car you will need to be doing a lot more miles per year than a petrol equivalent.

The total amount of company car tax you actually pay is ultimately dependent on the income tax rate for your annual salary.

So for example a 20% income tax payers would pay 20% of the taxable portion (BIK) of the car’s P11D value, typically deducted direct from your monthly salary.

Car BIK = { the cars P11D value } x { the cars CO2 associated car tax rate percentage }

Therefore, the amount you actually pay would be:

Amount company car tax per year = { car BIK } x { your salary tax bracket percentage }

For a VERY indepth approach, HMRC have published a complete step by step guide: HMRC car benefit calculation guide. Otherwise you can check out our Car and Fuel Benefits Calculator, or the examples provided below.

The Office for Low Emission Vehicles has also released a PDF document you can download from our site which you may find useful: FACTSHEET – Tax implications of ultra low emission vehicles

Auto Express have a pretty good guide on the best company cars for 2015 in various price brackets – so if you are looking for specific recommendations then it’s worth checking out. Otherwise you can find some examples below that we put together back in 2012, when this article was originally written.

• A 40% Taxpayer will pay under £80.00 per month for an SE-I model (excluding metallic paint)
• 10% Employee Benefit in Kind
• 100% First Year Write Down Allowance/Tax Relief equating to £6,184 (based on 26% Corporation Tax)
• Offset Contract Hire Rentals against Corporation Tax
• Fuel consumption combined of 68.9mpg (tested under European standard conditions)
• CO2 Emissions 94g/km
• Congestion Charge Exempt
• £0 Road Tax

*Calculations based on the following fuel prices: diesel £1.38, petrol £1.35 in 2012, 7.5% increase in 2013, 5% in 2014. Data sources: direct.gov, Thacham.