Company cars have always been popular and they can be a great incentive to offer to employees or attract the best candidates for your company. But with the tax changes and the government’s crackdown on diesel cars, is it still beneficial to have a company car?
Tax treatment of purchasing a company car
The tax treatment of the purchase of the vehicle depends on how the vehicle is financed. If a loan is taken out to purchase the vehicle, or the vehicle is purchased on Hire Purchase, then only the interest payments are an allowable company expense. The company would also be able to claim Capital Allowances to gain relief for the cost of the vehicle, which reduces the company’s taxable profit – however this amount is dependent on the CO2 emission levels of the vehicle.
If the vehicle is leased, i.e. your limited company does not own it at the end of the agreement, the monthly lease payments can be claimed as a business expenses. However, it is worth noting that 15% of the payments is disallowed for tax purposes for cars with CO2 emissions above 50g/km.
A benefit of having your company own the car would be that the running costs of the vehicle such as insurance and tax can be paid out of the company and are deductible for Corporation Tax.
Benefit in kind tax
Having a car in the business would create a taxable Benefit in Kind. This tax is payable by the company through Class 1A National Insurance contributions and also means tax is collected from the individual through adjusting their tax code. This tax is calculated as a percentage of the market list price (not what you end up paying for it!) and is also based on CO2 emissions. The list price is calculated as the market list price of the car when new, not the price you pay for the car, together with any extras added to the car.
Beware of the company paying for all of your fuel (both business and personal)! If this does happen, there is a flat calculation that gets added as a Benefit in Kind and can be costly to both the company in National Insurance and to the individual through their tax code. To avoid this we suggest either the individual keeps a record of their personal mileage and pays this back to the company or all fuel is paid for personally by the individual and then reclaimed from the business for business related trips.
What about electric or hybrid cars?
There are benefits to having electric cars as company cars including lower running costs and of course, environmental benefits. But mainly the low benefit in kind tax associated with electric cars could mean that a Tesla Model S Performance AWD Auto (which has a list price of £89,925) could be made available to your employee for only a £360 tax bill for a higher rate taxpayer!
Vehicles with zero CO2 emissions are also currently eligible for a 100% tax deduction in the year of purchase and are also exempt from Vehicle Excise Duty.
Hybrid cars can also be tax efficient in that those with CO2 emissions of 50 grams or less will also receive a low benefit in kind for tax purposes, however the capital allowances are less generous for hybrid cars.
Now is certainly the time to think about going green and perhaps investing in an electric car as a company car!
If you are thinking of investing in a company car, then please talk to us about the effect this will have on both your business and you personally.
The content in this blog is correct as at 9 June 2021.