Steer company car around tax obstacles
Government pressure in the UK and other countries has forced manufacturers to reduce car emissions dramatically over the last 15 years.
One tactic has been to tax company cars according to their CO2 output. Year on year, changing limits have meant that the tax charge for keeping the same company car has risen, with the exception of that for very high CO2 emitting cars.
Very low CO2 emitting cars qualify for especially low tax charges and gas-guzzlers have escaped the increases. It is drivers of company cars in the mid-range that continue to be hit the hardest, and those with older cars are worst off.
For example: In 2009 the CO2 emitted by a Vauxhall Vectra 1.8 was 175g/km. When the car was new the taxable benefit in kind was 23% of its list price, whereas for 2017/18 it’s 34%. Therefore, assuming a list price of £18,000 the taxable amount was £4,140 eight years ago, but it is now £6,120. As a 40% taxpayer that is an annual tax bill of £2,448, which is probably about what the car is worth.
Therefore, the question a director must answer is whether it is tax efficient to keep driving an ageing company car. The alternatives are to replace it with a lower CO2 emitting vehicle, but that costs money, or transfer it to their personal ownership.
If you are driving an old company car it can sometimes be transferred at a relatively modest initial tax cost. The taxable amount is the market value of the car at the time it is transferred. In our example, that is roughly 60% less than the taxable amount the director would have been charged had they retained the car as a perk. While it might be a no-brainer to transfer the car from the company to the director, the effect on future car running costs must be considered.
There are two ways to tackle these:
The company can still pay the running costs and obtain tax relief for them, but you will be taxed on the cost of the bills as a perk, though this is still likely to be cheaper than paying the car benefit charge. Plus, you’ll be able to reduce the tax bill by claiming a taxfree mileage allowance for your business journeys.
The company can pay you the tax-free mileage allowance (for which it can claim a tax deduction) and you can pay the bills. This option has the advantage that employers’ NI is not payable on a mileage allowance paid by the company, whereas it is on the value of the running costs it pays for you. However, if you do not drive much on business, the mileage allowance might not be enough to cover the car running costs you have to pay.
So, you (or your accountant) should do some number crunching to find the most tax-efficient option.