Fancy an £88,000 Porsche for £1,700 per annum? If so its time to reassess the company car
High levels of taxation have made the company car an unpopular choice. However, the tide could be turning in its favour explains chartered accountant Carl Elsby
The company car was once the most popular type of salary sacrifice reward amongst employees, executives and business owners. Highly valued as an important marker of success, the larger, faster and shinier the vehicle the better – until new tax rules made it an expensive perk.
Prior to April 2002, company car owners paid tax based on engine size and annual business mileage. However, the introduction of a more punitive emissions-based tax system over the past decade has made the traditional company car significantly less attractive financially.
Currently, a director or employee earning more than £8,500 per annum who has a company car is taxed on it as a benefit in kind. The amount depends on the P11D value of the vehicle, which is determined by the list price (plus extras, minus the cost of registration and road tax) and CO2emissions. It’s worth noting that the latter can be affected by extras such as automatic transmission and alloy wheels. As a benefit in kind, those earning £41,450 per year or less would pay 20% of this amount in tax, with people earning above that amount paying 40%.
Making the right choice
Higher tax rates have caused most accountants to advise owner-managed businesses to reduce their tax liability by opting for private ownership and charging business use mileage to the company. However, the combined effects of tax changes and the increased availability of environmentally friendly cars mean that this is no longer always the best option. Today, the company is worth considering once more.
Example one: A VW Golf 1.6 TDI Bluemotion costs £20,335 and has CO2 emissions of 85 gsm. If your company bought one of these before 31st March 2015, it would be able to write off the full cost against tax in that year – a corporation tax saving of £4,067 at the 20% small company rate.
The driver would be taxed on 13% of its value (£2,643 p/a). For a higher rate taxpayer this would be £1,057 p/a, but for a basic rate taxpayer it could be as low as £179 p/a, assuming they take the common director’s salary of £7,692. This allows them a benefit of £1,748 before they start paying tax, so in this case they would be taxed at 20% on just £895.
Example two: The Porsche Panamera S E-Hybrid retails at £88,967 and has emissions of 71 gsm. Again, the company can claim a full tax deduction, which in real terms would save corporation tax of at least £17,793 at 20%. The car benefit would be only 5% of the purchase price (£4,448), so the tax bill for a 40% tax payer would be a relatively insignificant £1,779 p/a.
The HMRC website has a car fuel benefit calculator which can be useful reference when weighing up the costs of different makes and models. Go to http://cccfcalculator.hmrc.gov.uk/CCF0.aspx.
Facts and figures in practice
One hundred per cent (100%) First Year Allowances are available on any car with less than 95 gsm up to 31st March 2015, and then for cars with less than 75 gsm until 31st March 2018.
For cars with emissions between 75gsm and 95 gsm, the tax is 10% in 2013-14, rising to 11%, 13% and 15% in the following three years. For each additional 5% rise in gsm, the percentage increases by 1%. The appropriate percentage will increase by 1% for all vehicles with CO2 emissionsbetween 95g/km and 215g/km, to a maximum of 35%.
Diesel vehicles are often a popular choice for company cars. However, there is currently a 3% supplement for a diesel car, although this is due to be abolished in 2016. Hybrids conform to the same tax rules as petrol cars, whilst electric cars are exempt until April 2015.
For cars with gsm below 75 (like the Porsche), the percentage is 5% until 5th April 2015 then 9% and 11% for the next two years.
Salary sacrifice schemes may also be worth considering for business owners, as well as staff on average wage levels. Rather than having a salary of £3,000 for example (which is subject to 20% tax and 13.8% NI), an employee could have an environmentally friendly car with much lower tax and NI.
Businesses have a responsibility to address the issue of carbon emissions and supplying environmentally friendly company cars is as good a way to start as any. No longer seen as uneconomical or undesirable, low emission vehicles are far more financially viable than their gas guzzling counterparts and can perform just as well. With the right vehicle, buying and running a car through the company makes sound fiscal sense once more.
Carl Elsby is MD of chartered accountants Elsby & Co who specialise in working with SMEs, start-ups and family businesses across the Midlands. For more information, visit www.elsbyandco.co.uk, call 01604 678470 or email firstname.lastname@example.org.