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Company cars and tax
image © Vauxhall
Years ago, I was offered a job by a start-up company looking for some input in the personal finance field.
image © Ford
The Ford Focus has become the most popular company car
“We are happy to pay a generous basic salary, plus bonus, for someone with your skills,” I was told. “The pension scheme is ‘defined benefit’ and we have an extremely good private medical scheme.” The clincher, I was told, was that up to £20,000 of the firm’s money to buy a company car: “We find that most of those who take up our offer of work really appreciate this particular benefit.” Sadly, I turned down the deal: it only included two weeks’ holiday in the first year, plus bank holidays, rising to four weeks after three years. Not enough time off, especially if you slog your guts out 60 hours a week – they also wanted me to sign a form waiving my rights under the EU Working Time Directive.
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But in any event, the evidence increasingly is that company cars are no longer the wonderful draws they were even a decade ago. This is because company car drivers are now taxed heavily on this “perk”, depending on how much it cost and how much it is judged to pollute the atmosphere.
How has the company car scheme changed?
In the past company car owners were taxed according to how many business miles they drove each year. The more miles a company car owner drove, the less tax he or she paid. Since April 2002 onwards, annual business mileage is irrelevant. Tax is now calculated on the quantity of carbon dioxide (CO2) emissions each car produces. Fewer emissions means you pay less tax – and viceversa
So what happens if you have a company car?
Fundamentally, the tax you pay is governed by four inter-related factors:
- The list price of the car, on the day before it was first registered, plus certain accessories
- The rate at which the car emits carbon dioxide (CO2)
- The fuel type
- Your highest rate of income tax
Where do you start?
The starting point for both current and new schemes is to work out the value or your car for tax purposes. This is the list price of your car plus delivery charges, taxes, VAT, car tax any accessories, such as a CD player, fitted before it was delivered, and any accessories costing over £100 that were fitted after it was delivered. There is an upper limit of £80,000 on the tax price of a car so anything costing more than this amount is, for tax purposes, priced at £80,000. If you have put some of your own money in to buy a more expensive car or model, then the list price is reduced accordingly: a £11,000 car bought with £9,000 of your company's money and £2,000 of your own is priced at £9,000.
What do I pay tax on?
image © Ford
The Ford Mondeo is another corporate favourite
You pay tax at your normal rate - 40%, 22% or 10%, depending on your overall earnings - on what is called the “car benefit”. The rate is based on a percentage of the car’s current list price. The highest charge is a 35% rate and the lowest charge is 15%. Since CO2 is the major greenhouse gas, the government’s tax is based on the number of grams of CO2 emitted per kilometre, as this is a simple system. A calculation is made once, when the car is first used as a company car, and this is then be used as the basis of the tax charge for each year that the car is used. The 15% tax charge applies to cars emitting less than 145 grams of CO2 per kilometre. This increases at a rate of 1% for each five grams per kilometre, up to a maximum of 35% for emissions in excess of 240 g/km. You can find your 2005/06 taxable percentage of the list price using the table above - click it to reveal it at full size.
How does it work?
Suppose you are driving a car that cost £20,000, with a petrol engine and CO2 emissions between 170 and 174 g/km. Assume you are a higher rate taxpayer. It would be classed as a taxable benefit of 21% on that £20,000, which comes to £4,200.
You pay 40% of that £4,200, which comes to £1,680 a year.
Where do you find out your CO2 emissions?
- Your car’s V5 document
- Your car dealer
- The government’s Vehicle Certification Agency: www.vca.gov.uk/
- The Society of Motor Manufacturers and Traders: www.smmt.co.uk/co2/co2search.cfm
What about mileage allowances?
Mileage rates, for business travel, paid at the following rates will not attract a charge to tax or NICs - see table on right.
What if you only use the car for part of the year?
If you only have access to the car for part of the tax year, the car benefit is reduced in proportion. So if you actually have the car for only five months, your car benefit will be just 5/12 of the total. If the car is off the road (perhaps because it has broken down) for more than 30 consecutive days, it is reduced in proportion to the number of days.
What about fuel?
Employees with company cars who are given free fuel or who are reimbursed by their employers for fuel that they use for private motoring also have to pay a tax charge. The employer, too, could be liable for NI contributions on the benefit.
The taxable benefit that occurs when an employer provides an employee with fuel for private motoring is calculated by applying the same percentage figure as for the car benefit - that is, to reflect the car's carbon dioxide emissions - to a fixed figure. This is set at £14,400 for 2005/6.
If, for example, a car has carbon dioxide emissions of 195g/km, the percentage used to calculate the company car tax charge is 26%. The fuel scale charge will therefore be £14,400 x 26% = £3,744.
Fuel for company cars, however, does not attract tax and NICs in every instance.
What if you use your own car?
If you use your own car for business purposes, your employer can pay you a mileage based allowance. This is called the Inland Revenue Authorised Mileage Rate (IRAMR). These allowances are tax-free and usually work out to be more tax efficient than a fixed monthly allowance.
There are two rates of IRAMR to reflect the fact that some motoring costs - eg tax, insurance etc - are fixed and some, such as fuel, increase in direct proportion to the number of miles covered.
The accepted payments are 40p per mile for the first 10,000 miles and 25p per mile thereafter for all cars and vans, regardless of size. These are important figures, even for self-employed people as the Inland Revenue is likely to accept these rates when they set their business mileage against their self-assessment tax.
What about company vans?
The rules changed in April 2005, so that there will only be a taxable benefit where an employee has unrestricted private use of a company van.
The taxable benefit remains at its previous level of £500 (or £350 for older vans). If the employer specifically prohibits private use, other than “ordinary commuting” and other ‘insignificant’ private use, there will be no charge at all.
Which is the best option for me - a company car or a car allowance?
As always with tax - it depends on your personal circumstances. You need to look at the monthly allowance on offer, deduct tax and NI contributions and add in the monthly tax saving from not having a company car.
You can then calculate whether the remaining sum will be enough to cover your motoring costs, including depreciation, servicing, insurance and so on?
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