Company Car Tax

We look at the regulations and potential costs your business could face due to company car tax, identifying where you might save money

Company Car Tax

The basis for taxing those who use company cars is to tax a figure calculated by multiplying the car’s list price by an emissions-based percentage (the “appropriate percentage”), with a 3% surcharge on diesel powered cars.

The maximum taxable value of the benefit is 35% of the list price of the car when first registered. The list price includes car tax (if applicable), Value Added Tax and delivery charges. There is no longer an upper limit of £80,000.

Cars emitting CO2 at or below a specified level are taxed on 15% of the list price. This is the usual minimum charge and will apply up an emission level of 139 g/km.

Cars running solely on diesel fuel are subject to a 3% supplement. Special rules apply to cars running on electricity, electricity and petrol, gas or petrol and gas, and E85 fuel, which are generally seen as more environmentally friendly.

For cars which cannot produce CO2 emissions under any circumstances when driven, the appropriate percentage is reduced to 0%, thereby reducing the car benefit charge for “electric cars” to nil.

For cars emitting between 1 and 75 g/km the appropriate percentage is reduced to 5% until 5 April 2015.

Cars with higher levels of CO2 emission are taxed on a graduated scale rising to a maximum (for both petrol and diesel) of 35% of the car’s price. These figures apply to all company cars, including second cars.

CO2 emission information

For all cars first registered from at least November 2000, the definitive CO2 emissions figure for tax purposes is recorded on the Vehicle Registration Document (V5). Under an agreement with HM Revenue & Customs (HMRC), the Society of Motor Manufacturers and Traders (SMMT) is providing a CO2 emissions enquiry service on their website at www.smmt.co.uk for cars first registered from January 1998.

Older cars

Cars first registered before January 1998, for which there are no reliable CO2 emissions data, will be taxed according to their engine size, as follows:

Engine Size (cc)
Percentage of car’s price charged to tax

0 – 1400
1401 – 2000
2001 and more

15%
22%
32%

Fuel scale charges

Where the employer pays for any fuel used privately by the employee, there is an additional scale charge based on the CO2-based car benefit percentage applied to a standard value of £20,200.

Employee contributions

Where the employee is required, as a condition of the car being made available, to pay for the private use of a car the value of the benefit is reduced accordingly (on a pound for pound basis). Capital contributions of up to £5,000 made by employees towards the cost of the car and/or accessories, when the car is first made available, will reduce its price for tax purposes.

By contrast it is “all or nothing” for the fuel scale charge, which remains at the full value unless the employee pays for all private fuel!

HMRC publishes advisory fuel rates for company cars which will be accepted either for employers re-imbursing employees for the cost of fuel for business mileage, or for employees re-imbursing employers for the cost of fuel for private mileage. Alternative rates may be negotiated, for example when it is necessary for the performance of his or her duties that an employee uses a four-wheel drive vehicle, a higher rate per mile might be agreed due to the typically higher fuel consumption of such vehicles.

Advisory fuel rates (from 1 March 2012)

Engine size Petrol Diesel LPG
1400cc or less 15p 13p 10p
1401cc to 1600cc 18p 13p  12p
1601cc to 2000cc 18p 15p 12p
Over 2000cc 26p 19p 18p

Petrol hybrid cars are treated as petrol cars for this purpose.

Tax payable

These standard charges are subject to income tax at basic, higher or additional rate (depending on the employee’s rate of pay). The tax is usually collected under the PAYE system by appropriate adjustment of the employee’s tax code.

For the benefit to be attractive, the employee must pay less in extra tax than it would cost him to run his own car out of his taxed income. The following table shows examples of the 2012-13 tax costs to an employee of a company car.

 

List Price

 

Engine Size
cc

CO2
emission
g/km

Tax Rate 20%

Tax Rate 40%

Petrol

Diesel

Petrol

Diesel

Car
£

Fuel
£

Car
£

Fuel
£

Car
£

Fuel
£

Car
£

Fuel
£

£13,000 1800 160 598 929 676 1,050 1,196 1,858 1,352 2,101
£18,000 1300 198 1,080 1,212 1,188 1,333 2,160 2,424 2,376 2,666
£25,000 3000 235 1,750 1,414 1,750 1,414 3,500 2,828 3,500 2,828

 

List Price

 

Engine Size
cc

CO2
emission
g/km

Tax Rate 50%

Petrol

Diesel

Car
£

Fuel
£

Car
£

Fuel
£

£13,000 1800 160 1,495 2,323 1,690 2,626
£18,000 1300 198 2,700 3,030 2,970 3,333
£25,000 3000 235 4,375 3,535 4,375 3,535

 

Tax free benefits

Car Parking: The provision of a car parking space at or near the employee’s place of work is not an assessable benefit.

Pooled Cars: There is no tax for using a pooled car. This is one where private use is merely incidental to the business use, and it is not normally used by one employee to the exclusion of all others. Please note: A pooled car must not normally be kept overnight at or near an employee’s home.

“Lower Paid” Employees: The provision of a car for an employee (NOT a director) who is paid at a rate below £8,500 per year (including the value of benefits) does NOT attract any charge to income tax. Nor is there any charge on fuel for private use provided to such employees.

Special Consideration for Sole Traders: If your spouse is employed in your business (but not as a partner), it can be very tax efficient to provide them with a car, as long as they earn well below £8,500. The use of the car can be tax-free in their hands, and the business will get full tax relief on all the expenses connected with the car, provided you can demonstrate the car is necessary for business purposes.

Business use of employees’ own vehicles

It is quite normal practice for employees to be reimbursed at a reasonable mileage rate for business use of their own vehicles. The tax and national insurance position is as follows:

A statutory system of Approved Mileage Allowance Payments (AMAPs) applies for employees using their own vehicles for business journeys, as follows:

on the first 10,000 miles in the tax year on each additional mile above this
Cars and vans 45p per mile 25p per mile
Motorcycles 24p per mile
Bicycles 20p per mile

It is no longer possible to make a claim for tax relief based on the actual receipted bills, nor claim capital allowances or interest on loans related to car purchases.

Unless the employee is reimbursed at a rate higher than the AMAP rate, the payments do not need to be reported on a P11D. If the employer pays less than these rates, it is possible for the employee to claim tax relief for the shortfall (Mileage Allowance Relief).

Rates of up to 5p per mile, per passenger, are also tax- and NICs- free when paid for the carriage of fellow employees on the same business trip. From April 2011 allowances for passenger payments have been extended to volunteers.

Company vans

The taxable benefit for the unrestricted use of vans will be £3,000. There is a further £550 of taxable benefit if the employer provides fuel for private travel.

Van and fuel charge

2011-12

Tax (20% taxpayer)

    £710

Tax (40% taxpayer)

£1,420

Tax (50% taxpayer)

£1,775

Employer’s Class 1A NICs

£489.90

Van drivers can avoid the benefit in kind charge of £3,000 per year, if they agree not to use the van for personal journeys. Driving to and from work is acceptable as long as there is a reasonable amount of business use. It is advisable to keep a regular check on the vehicle’s mileage to ensure the ‘only for business rule’ is kept.

The flat rate is reduced to nil for vans emitting zero CO2 (eg “electric vans”). There is no fuel benefit for such vans.

Tax saving check list

  • Keep adequate records of business mileage.
  • Always check your tax code to see that the correct benefit is being applied.
  • Sole traders and partners should consider the potential tax advantages of providing their spouse with a company car.
  • If you have low private mileage, you may be better off if you pay for all your own private fuel.
  • If you have high business mileage, it may be better to use your own car and claim “mileage” from your employer.
  • Encourage your employer to apply for a P11D dispensation.
  • If you are on the borderline of “lower paid”, think about setting up a contribution for the use of the car, to keep on the right side of £8,500.
  • Tax-free parking is a must!

If you would like further advice on this subject, please contact Kevin Gilbert, Partner at Morris Crocker Chartered Accountants. kmg@morriscrocker.co.uk

This article is for guidance only and professional advice should be obtained before acting on any information contained herein

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