For many years the company car has been a recognised benefit-in-kind for many employees. However, over the years, the tax cost of driving a company car has crept up and more employees are opting for private car ownership. Simon Littlejohns, partner and Head of Tax at Friend Partnership examines the tax implications of driving a company car and provides some tips to help reduce the associated tax costs.
Car ownership plans
There are a number of car ownership plans that enable employers to provide cars to employees without triggering the benefit-in-kind (BIK) rules. However, care is needed as recent tax cases have shown that HMRC are looking closely at this issue and seeking tax in those cases where the planning has not been implemented correctly. Typically, car ownership plans are only viable for those organisations with large car fleets.
The benefit in kind rules for company cars
- The price of the car when new, including accessories, needs to be ascertained. Note it is the price when new and not second hand;
- The CO2 emissions rating for the car will then determine the percentage which needs to be applied to the price to get the taxable BIK. The percentages can be found on the HMRC website for the respective tax year and typically the percentage increases year on year with a 3% addition for diesel cars;
- Appropriate allowance is made for vehicles not available throughout a particular tax year or that are off the road for extended periods;
- Any personal contribution will affect the calculations; and
- The BIK amount ascertained above is subject to income tax at the individual’s marginal rate for the year in question.
Useful guidance can be found at: www.gov.uk/tax-company-benefits/overview
If an individual is provided with private fuel then a separate BIK charge arises which is based on an amount set for each year, to which the percentage determined above is then applied.
Note that the fuel benefit applies if one drop of private fuel is provided in any tax year and this amount is not reimbursed by the individual concerned. Travel to work is private mileage.
How to reduce the tax cost of a company car
There are, however, a few things that could be considered to help manage or reduce the individual employee’s tax cost:
- Select a vehicle with as low a CO2 emission rating as possible. Vehicles with alternative technologies (electric/hybrid etc.) have the lowest BIK tax rate;
- Make a personal contribution;
- Review the private fuel position. In many cases individuals with a private fuel BIK are not doing sufficient private miles such that it would be ‘cheaper’ for them to pay for their own private fuel;
- If your employer allows, consider forgoing a company car in favour of a car allowance. With a mileage rate at 45p for the first 10,000 business miles and the allowance this can be a cheaper alternative for some employees;
- Ensure you understand the separate and specific rules to deal with older cars, vans and motorcycles which are provided to the individuals by their employers.
The push towards green technologies is ensuring that the tax rules are moving in line making it more costly for those individuals driving company cars. This increase in tax will continue with each year’s Budget.
It pays for all employees with company cars to examine the tax rules. In most, if not all, cases savings can be made. These savings can be for both the individual and their employer.