Should you have a company car?

  • by Carole Jordan
  • 02 Oct, 2017
should you have a company car businessheads accountants and tax advisors brighton

This is the second most popular question from business owners. This sounds like a simple question but the answer is complex and involves many aspects to consider. The answers will depend on the make of the car, the tax position of the owner, their business and the method of ownership.

Tax savings on a company car

Here are some bullet points to consider. Making the wrong decision can be expensive so be sure to look at all these and consult your accountant for advice.

  1. The most tax effective cars are low emissions vehicles.  In tax year 2017/18 the cost of cars with emissions below 75g/km are 100% deductible against the profits of a business. However, these kind of cars can be expensive to purchase and don’t always provide the features the owner needs. Most people like to have a car they enjoy more than a tax effective car!

    Cars with emissions higher than 95g/km but less than 130g/km attract 18% of the reducing cost as a tax deduction each year and for any cars with emissions greater than 130g/km the allowance each year is only 8% on a reducing balance basis.

  2. You cannot claim the VAT on purchasing a car but you can claim VAT on lease payments if you are happy financing your car this way. Only 50% of the VAT on lease payments may be claimed if there is private use of the car.

  3. All the running costs of a company car can be deducted against profits including tax, insurance and maintenance.

  4. Interest on HP and lease costs can be claimed at 100%.

  5. Petrol can be paid for by the business and VAT claimed on the cost, however a fixed charge representing the private element of the petrol is payable on the business VAT return from £46 per month, increasing based on CO2 emissions.  This is called the Fuel Scale Surcharge. (link below) If private use is high it’s usually better not to claim any VAT, or alternatively if petrol receipts are retained and mileage records kept, petrol can be claimed at the Fuel Advisory Rates (link below) for the business miles done.

Tax costs on a company car

The value of the benefit of private use of a company car is calculated by multiplying the original market value of the car by a percentage based on the CO2 level of the car. 

If petrol is supplied, this is assessed as a fixed figure based on CO2 emissions

The percentage starts at 7% for a car with emissions less than 50g/km extending to 37% where emissions are 200g/km or greater. You can calculate the taxable benefit using the HMRC calculator below. 

The company pays Employers National Insurance (Class 1A) on this amount at 13.8% currently. 

The value calculated is called the ‘cash equivalent’ and is the value of a taxable benefit on the user. You will pay tax at your top rate on this value. Either 20%, 40% or 45% in 2017/18. 

If you can make contributions to the capital amount or the running costs to accommodate your private usage this amount is deducted from the ‘cash equivalent’ thereby reducing your tax. 

If you are able to take income by way of dividends then it is unlikely that a company car will be beneficial as drawing funds from the Company to purchase and run the car is likely to be cheaper than using Company funds and paying additional tax. 

If, however, you are unable to draw funds as dividends due to accumulated losses or other constraints then a Company Car may not be as expensive as additional salary to cover the cost incurred personally. 

And, the lower the emission of the car and the higher your personal tax rate the more likely it is that a company car will be beneficial to you. 

To establish whether a Company Car is financially worthwhile for you the detailed calculations should be made on the cost of ownership. We provide our clients with a three year calculation showing how the payment for the car, the tax deductions and payable come together. This way we establish whether the total cost is less within the company than owning the car personally and funding this cost through dividends. 

Where to start?

You can see that this is complex because it is specific to the car, the method of purchase and the company and individual’s circumstances.

My advice on company cars

  1. Choose the type of car you would like and decide how you will pay for it.

  2. Establish how much it would cost you to run it privately.

 

This will provide you with a net income figure which you need from which you can calculate the gross cost including tax. It is this figure which should be compared to the costs and tax reliefs and charges incurred by the Company. 

Where the costs of running the car personally exceed the costs of owing the car through the company then you will be making savings every year of ownership. 

As the car ages you will begin to realise that because the taxable benefit of the car remains the same whilst the value of the car depreciates, at some point it is worth transferring the car to your personal ownership if you don’t plan to replace it. We'll talk about that more in a later post...

Making the wrong decision on a company car can be costly for yourself and your business. Before making any decisions you should consult the advice of an accountant. We are qualified to give advice in this area, so please give us a call on: 01273 882200.


If you'd like to read up a bit more on this topic first, then see our other posts on this topic...

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