Is your company car costing you more than it should?
We work with a lot of new businesses, entrepreneurs who have ditched the corporate world to live the dream of being their own boss and, if things are successful, someone else’s boss too. Working with start-ups brings a certain level of passion and excitement to almost every conversation. Even when things aren’t going as well as expected our clients are an enthusiastic and motivated bunch. With “P11D season” finished for another year there is one area that new business owners might sometimes overlook; the perk of the company car.
When you are an employee having a company car is great. You could get a brand new, hassle-free car every three or four years and pay a bit of extra tax through your tax code – maybe £200 a month – much cheaper than buying your own car!
When you set up a limited company (as someone told you that was more tax efficient and you will be protected from creditors) the first thing you want to do is restore the status quo – you want the same salary as when you were an employee and the company car; this is a proper business that can pay employees after all!
But there is a difference in paying for a company car to incentivise key employees and having your company pay for a company car for you. If you own the company, a company car is not a hassle-free perk that is going to incentivise you to stay with the firm and work hard. It is just a payment that comes from the company bank account, rather than your own account.
Of course we all know that a company is a separate legal entity and the company funds can never be viewed as personal funds, but sometimes to consider the most tax-efficient option we need to combine both. So, what are the tax implications?
Company cars are a benefit in kind (BIK) and employees are taxed on the cash-equivalent value. This cash value is based on the list price when new and the Co2 emissions. Basically, the bigger and faster your car is, the more tax you pay.
A few key points here:
Let’s look at an example of how this works.
These are the calculations (BIK Tax = (List price x Co2 % rate) x your personal rate of tax):
|BIK Tax Charge||7,000|
|Employee Pays Tax of||£1,400||£2,800|
|Employer Pays Tax of||£966|
|Total Cost to Employer||£|
|Total cost for car (including insurance and maintenance)||3,775|
|Corporation Tax Saving||(1,091)|
Alternatively, the company could simply pay the employee a mileage rate of 45p per mile for using their own car on business-related journeys.
|Pay Mileage Only||4,500|
|Corporation Tax Saving||(855)|
|Additional cost of company car versus mileage||1,005|
If this car is provided to an employee, they’ll pay circa £235 per month (if they’re a 40% taxpayer). The company will pay an additional £1,005 to provide a company car, rather than paying mileage. The company sees this as reasonable cost to appropriately incentivise an employee with relatively high business miles.
If you own the company (we hope you don’t need an incentive to stay) a company car is, as we have said, just a payment that comes from the company bank account, and not your own personal account.
Looking at the same scenario but this time the car is provided to you, the business owner and assuming you are a higher-rate taxpayer – because let’s face it, if you are running your own business, you are most likely doing the job of ten people, so you would hope to be paid at least the salary of two!
We’re going to look at the combined cost to you and the company.
|If the Company Pays For The Car||You Pay||Company Pays||Total|
|Personal BIK Tax||2,800||–||2,800|
|Company Pays for the Car||–||4,650||4,650|
|If You Charge The Company For Mileage||You Pay / (Receive)||Company Pays||Total|
|Company Pays You / (You Receive From The Company)||(4,500)||3,645||(855)|
|You Pay – Car||3,775||–||3,775|
|You Pay – Fuel for Business Miles||1,000||1,000|
|Total saving if you pay for the car yourself||3,530|
So, you’re saving £3,530 if you pay for the car yourself. Personally, as a business owner, a company car is not a benefit that I would consider. I would rather use that £3,500 to take myself across Route 66.
It is usually a good idea to ask your accountant what they would do. Chances are, if it is tax efficient, they will be doing it.
Also bear in mind, from April 2020 the government will be offering much more attractive BIK rates of 2% on electric vehicles. If you see us driving new Teslas next spring, maybe give us a call.