The Future of Company Cars
In the Finance Act 2014, company car tax rates were announced up to the 2018/19 tax year, enabling us to calculate the taxable benefit arising on company cars for a number of years.
Currently, the tax treatment of company cars depends on the CO2 emission level of the car which determines a percentage to apply to the list price of the car. The resulting benefit is then treated as employment income for the employee, declared on a P11D. The employer pays Class 1A National Insurance, currently at 13.8%, on the same value. The percentages for different emission levels change slightly each tax year.
Somewhat surprisingly, the biggest impact going forward is on low emission cars. In the current tax year, a petrol car with emissions of 60 g/km is subject to a percentage of 5%. If the list price is £12,000 then the car benefit is £600.
By 2018/19, the applicable percentage for the same car will be 16%, giving a benefit of £1,920 based on the £12,000 list price.
In contrast, a high emission petrol car with 205 g/km and the same list price of £12,000 is subject to 34% in 2014/15, or a benefit of £4,080. By 2018/19, the same car is subject to 37% and a benefit of £4,440, an increase of only 9% from 2014/15.
Alternatives to the company car
As both employers and employees will pay more as the car benefit increases it is in both interests to reduce or eliminate the tax charge.
There are a number of options:
- Withdraw the company car and replace it with enhanced salary and/or a staff loan. An employer can reimburse an employee for business use of their own car, tax free at up to the statutory mileage rate (45p per mile for the first 10,000 business miles and 25p thereafter). Employees can receive an interest free loan from their employer of up to £10,000 in order to purchase their own car without incurring an employment benefit on the loan (although there are additional rules for directors, shareholders and their relatives).
- Replace the company car with a lower emission or lower list price car. Although the tax charge for all cars is increasing, the effects can be reduced by replacing a high emission or high value car with a lower emission or cheaper car.
- Provide pool cars for general use. Such cars are however subject to strict criteria, for example pool cars must be kept overnight at work premises and they must be used by a number of different employees. Essentially, the car cannot be available for private use in order to avoid a taxable benefit. Due to the strict criteria, pool cars are not suitable for all businesses.
- Consider substituting a company car with a van. A van currently has a taxable benefit of £3,000 only, making it a cheaper alternative than many cars. Some large 4 x 4’s qualify as vans by being double cab pick ups, making them an unlikely means of tax saving.
It is important to note in connection with all of the above that legal advice should be sought before changing employees remuneration or terms of employment.
If you would like any further information or advice in connection with this, please contact our Tax Director, Jenny Marks.