Tax and the Company Car - Company Formation Related Services
The company car is an essential work tool for some and a perk of the job for others. Changes to the system of taxing company cars which came into effect on 6 April 2002 mean that "essential tool" cars are taxed just as heavily as cars which are not used at all for business. Even the Government has admitted that this was likely to result in an increase in perk cars.
The taxable value of the benefit continues to be up to a maximum of 35% of the list price of the car when first registered. The list price includes car tax (if applicable), Value Added Tax and delivery charges, and is subject to an upper limit of £80,000.
However, the old discounts for mileage and age were abolished and replaced by a scale graduated according to the level of carbon dioxide (CO2) emissions, expressed in grams per kilometre (g/km).
Cars emitting CO2 at or below a specified level are taxed on 15% of the list price. This is the usual minimum charge and will apply up to the following levels of emissions:
| 2006/07 |
144 g/km |
| 2005/06 |
144 g/km |
| 2004/05 |
149 g/km |
| 2003/04 |
159 g/km |
| 2002/03 |
169 g/km |
Cars running solely on diesel fuel are subject to a 3% supplement, unless the car meets the Euro IV standard. Special rules apply to cars running on electricity, electricity and petrol, gas or petrol and gas, which are generally seen as more environmentally friendly.
Cars with higher levels of CO2 emission are taxed on a graduated scale rising to a maximum (for both petrol and diesel) of 35% of the car's price. The detailed figures are shown in the Appendix. These figures apply to all company cars, including second cars.
CO2 emission information
For all cars first registered from at least November 2000, the definitive CO2 emissions figure for tax purposes will be recorded on the Vehicle Registration Document (V5). Under an agreement with the Inland Revenue, the Society of Motor Manufacturers and Traders (SMMT) is providing a CO2 emissions enquiry service on their website at www.smmt.co.uk for cars first registered from January 1998.
Older cars
Cars first registered before January 1998, for which there are no reliable CO2 emissions data, are taxed according to their engine size, as follows:
| Engine Size (cc) |
Percentage of car's price charged to tax |
| 0 - 1400 |
15% |
| 1401 - 2000 |
22% |
| 2001 and more |
32% |
Fuel scale charges
Where the employer pays for any fuel used privately by the employee, there is an additional scale charge based on the CO2-based car benefit percentage applied to a standard value of £14,400.
Employee contributions
Where the employee is required, as a condition of the car being made available, to pay for the private use of a car the value of the benefit is reduced accordingly (on a pound for pound basis). Capital contributions of up to £5,000 made by employees towards the cost of the car and/or accessories, when the car is first made available, will continue to reduce its price for tax purposes.
By contrast it is "all or nothing" for the fuel scale charge, which remains at the full value unless the employee pays for all private fuel!
The Inland Revenue has published baseline rates which will be accepted either for employers reimbursing employees for the cost of fuel for business mileage or for employees reimbursing employers for the cost of fuel for private mileage. Alternative rates may be negotiated, for example when it is necessary for the performance of his or her duties that an employee uses a four-wheel drive vehicle, a higher rate per mile might be agreed due to the typically higher fuel consumption of such vehicles.
| Baseline fuel mileage rates |
| Petrol |
Diesel |
| Engine size |
Rate per mile |
Engine size |
Rate per mile |
| Up to 1400cc |
10p |
|
|
| 1401 - 2000cc |
12p |
Up to 2000cc |
9p |
| Over 2000cc |
14p |
Over 2000cc |
12p |
Tax payable
These standard charges are subject to income tax at basic or higher rate (depending on the employee's rate of pay). The tax is usually collected under the PAYE system by appropriate adjustment of the employee's tax code.
For the benefit to be attractive, the employee must pay less in extra tax than it would cost him to run his own car out of his taxed income. These are examples of the 2004-05 tax costs to an employee of a company car:
| List Price |
Engine Size cc |
CO2 emission g/km |
Tax Rate 22% |
Tax Rate 40% |
| Petrol |
Diesel |
Petrol |
Diesel |
| Car£ |
Fuel£ |
Car£ |
Fuel£ |
Car£ |
Fuel£ |
Car£ |
Fuel£ |
| £13,000 |
1800 |
165 |
543 |
602 |
629 |
697 |
988 |
1094 |
1144 |
1267 |
| £18,000 |
1300 |
200 |
1030 |
824 |
1148 |
919 |
1872 |
1498 |
2088 |
1670 |
| £25,000 |
3000 |
240 |
1870 |
1077 |
1925 |
1109 |
3400 |
1958 |
3500 |
2016 |
Tax free benefits
The provision of a car parking space at or near the employee's place of work is not an assessable benefit.
There is no tax for using a pool car. This is one where private use is merely incidental to the business use, and it is not normally used by one employee to the exclusion of all others.
Please note: A pool car must not normally be kept overnight at or near an employee's home.
The provision of a car for an employee (NOT a director) who is paid at a rate below £8,500 per year (including the value of benefits) does NOT attract any charge to income tax. Nor is there any charge on fuel for private use provided to such employees.
- Special Consideration for Sole Traders
If your spouse is employed in your business (but not as a partner), it can be very tax efficient to provide them with a car, as long as they earn well below £8,500. The use of the car can be tax-free in their hands, and the business will get full tax relief on all the expenses connected with the car, provided you can demonstrate the car is necessary for business purposes.
Business use of an employee's own car
It is quite normal practice for employees to be reimbursed at a reasonable mileage rate for business use of their own cars.
A statutory system of tax and national insurance free mileage rates applies for business journeys in employees' own vehicles, as follows:
| Cars and vans |
|
| On the first 10,000 miles in the tax year
|
40p per mile |
| On each additional mile above this
|
25p per mile |
| Motor cycles |
24p per mile |
| Bicycles |
20p per mile |
It is no longer possible to make a claim for tax relief based on actual receipted bills, nor claim capital allowances or interest on loans related to car purchases.
Unless the employee is reimbursed at a rate higher than the statutory mileage rate, the payments do not need to be reported on a P11D.
Tax saving check list
- Keep adequate records of business mileage.
- Always check your tax code to see that the correct benefit is being applied.
- Sole traders and partners should consider the potential tax advantages of providing their spouse with a company car.
- If you have low private mileage, you may be better off if you pay for all your own private fuel.
- If you have high business mileage, it may be better to use your own car and claim "mileage" from your employer.
- Encourage your employer to apply for a P11D dispensation.
- If you are on the borderline of "lower paid", think about setting up a contribution for the use of the car, to keep on the right side of £8,500.
- Tax - free parking is a must!
| Emissions Table |
| CO2 emission(g/km)* |
Percentage of Car's Price Taxed |
| Petrol |
Diesel |
| 2003-04 |
2004-05 |
2003-04 |
2004-05 |
| 145 |
15% |
15% |
18% |
18% |
| 150 |
16% |
19% |
| 155 |
17% |
20% |
| 160 |
16% |
18% |
19% |
21% |
| 165 |
17% |
19% |
20% |
22% |
| 170 |
18% |
20% |
21% |
23% |
| 175 |
19% |
21% |
22% |
24% |
| 180 |
20% |
22% |
23% |
25% |
| 185 |
21% |
23% |
24% |
26% |
| 190 |
22% |
24% |
25% |
27% |
| 195 |
23% |
25% |
26% |
28% |
| 200 |
24% |
26% |
27% |
29% |
| 205 |
25% |
27% |
28% |
30% |
| 210 |
26% |
28% |
29% |
31% |
| 215 |
27% |
29% |
30% |
32% |
| 220 |
28% |
30% |
31% |
33% |
| 225 |
29% |
31% |
32% |
34% |
| 230 |
30% |
32% |
33% |
35% |
| 235 |
31% |
33% |
34% |
| 240 |
32% |
34% |
35% |
| 245 |
33% |
35% |
| 250 |
34% |
| 255 |
35% |
| 260 |
| 265 |
* The exact CO2 figure is rounded down to the nearest 5 g/km
Do call us on 0207 608 5500, if you would like further help or advice on this subject.
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