The tax rules concerning cars and car benefits have repeatedly been changed
in recent years so it is difficult to know whether to have a private
or company owned vehicle. This article examines the position from the
company’s and the employee’s point of view. In
general most employers are looking to avoid providing company cars as
they are not tax efficient. However - you may not by typical.
The company The capital cost of vehicles is set against a company’s taxable profits
over a number of years through the system of capital allowances. This
normally allows 25% of the cost to reduce profits each year, but the capital
allowance for company cars is restricted so only a maximum of £3,000 per
year can be off-set against profits for each car. The full cost of the
car does get tax relief eventually, but it can take a long time.
However from 17 April 2002 until 31 March 2008 businesses can claim 100%
capital allowances when they purchase new environmentally friendly cars.
This means the company can claim the full cost of a new car against its
profits in the year of purchase, rather than waiting several years to
get tax relief for the expense.
To qualify as ‘environmentally friendly’ the car must have a CO2 emissions
figure of no more than 120 gr/km. There are currently about 42 new models
that motor manufacturers certify comply with these emissions requirements,
including some types of Vauxhall Astra, the Peugeot 307 1.4 HDi and the
Ford Fiesta 1.8TDdi. All electrically powered cars also qualify.
Leased cars Many companies lease cars rather than buy them outright, so they pay
a monthly rental rather than an up front capital charge. The amount of
the monthly rental that can be set against taxable profits is restricted
when the car’s original price is £12,000 or more. However if the leased
car fits the environmentally friendly conditions above the entire rental
cost can be set against profits without restriction.
The employee The taxable benefit for employees using company cars has risen by
approximately 20% every year over the last five years, so now driving
a company car can be a very expensive option. But the tax charge depends
on precisely which car you drive not on how many miles you drive on business.
Example Compare the Vauxhall Astra 1.8i 16v automatic (CO2 emissions: 207
gr/km), and the diesel version of a similar car: Vauxhall Astra 1.7Dti
16v (CO2 emissions: 119gr/km).
Car model:
Astra 1.8 automatic
Astra 1.7 diesel
List price:
£15,990
£13,300
Percentage of list price
taxed as car benefit:
23%
18%
Taxable benefit:
£3,677
£2,394
The difference of £1,283 in the
taxable benefit equates to £513.2 in tax per year for a higher rate taxpayer
driving the slightly larger car.
Plan for the future The percentage of list price which forms the basis of the taxable
benefit is calculated from a table of emission values and fuel types as
shown on the Tax Rates page.
The minimum taxable benefit is achieved by driving a petrol car with emissions
of 165 gr/km or less, or an alternative fuel powered vehicle. However
that table of values only applies for 2002/03, in future years the emissions
figure required to achieve the minimum taxable benefit is reduced. In
2004/05 a petrol powered company car will need to have an emissions rating
of 145 gr/km or less to generate a taxable benefit of 15% of the list
price. So if you are planning to change your company car now choose one
with the lowest possible CO2 emissions rating which will also fit your
business requirements.
Fuel or not Providing free fuel for private use in a company car is no longer
tax efficient unless you drive at least 15,000 to 18,000 private miles
a year. The amount of taxable benefit arising from free car fuel depends
on the size of the car engine, as shown on the Tax
Rates page.
From 6 April 2003 the car fuel benefit will be based on the same percentage
used to work out the car benefit. However instead of applying this percentage
to the car’s list price it will apply to a notional value of £14,400 for
2003/4. For an average priced car this will mean that receiving free fuel
with the company car will approximately double the total taxable benefit
charged for that car.
Other Advice Calculation of tax due is no longer straightforward.
Investment income, dividends and capital gains are charged at different
tax rates. You need to make sure that you do the calculation in the most
beneficial way.
Plan for the future
The tax rules concerning cars and car benefits have repeatedly been changed
in recent years