Businesses that provide employees with taxable benefits: company cars, health insurance and so on, will be aware that a benefit in kind charge is added to the employee’s income and subjected to an income tax charge the same as their salary.
Employers will also be aware that the cumulative sum of all the taxable benefits of their employees are subjected to an employers’ National Insurance charge – at present, this Class 1A charge amounts to 13.8% of all taxable benefits provided.
Which means the true cash cost of providing £10,000 of taxable benefits is £11,380.
Unfortunately, some benefits are not based on an identifiable cost, but on a scale rate applied by HMRC. Of particular concern are car and car fuel benefits for the use of company cars.
Consider Thrifty Ltd, who provide a second hand Toyota to Jane, a salesperson. The annual cost to the company is calculated as:
- Fuel £200 per month, of which £25 covers private fuel.
- A further £100 per month to cover insurance, repairs, and road tax, and
- The car was purchased for £12,000 second hand – and is expected to be worth £4,000 after 4 years – and so the expected annual depreciation amounts to £2,000. The cost of the car when new was £19,000.
The company consider the overall, annual cost of £5,600, including depreciation, to be acceptable.
The CO2 rating of the car is 122 g/km, and Jane’s annual benefit in kind charge for 2016-17 is (£19,000 x 21%) £3,990. The 21% is the scale rate applied by HMRC to cars with a CO2 rating between 120 – 124 g/km). Not bad, Jane is only being taxed on £3,990 when the underlying cost of the car for 2016-17 was £5,600.
Unfortunately, this is not the complete story. The company pays for all of Jane’s fuel, including fuel for private use. This means the car fuel benefit charge applies and this is based on the formula – £22,200 x 21% – £4,662.
Therefore, Jane’s total car and car fuel benefits amount to £8,652 (£3,990 £4,662), when the underlying cost to her employer is just £5,600, and Thrifty Ltd will have to stump up £1,194 in Class 1A NIC, increasing the annual cost of providing the car to £6,794. The true rate of NIC payable is therefore 21.3% (£1,194/£5,600*100).
In this particular case, Jane would be advised to pay Thrifty Ltd the £25 a month to cover her private fuel. At a stroke this would mean the car fuel benefit would no longer apply, and reduce her taxable benefits for the use of the car from £8,652 to £3,990. As a bonus, the company Class 1A NIC would also reduce, from £1,194 to £551. As the true cost of the car is still £5,600, this reduces the effective NIC charge to 9.8% (£551/£5,600*100).
We are happy to discuss this conundrum with readers who feel they could benefit from advice in this area.