Once you decide to buy a car, the question arises as to how you should buy it.
You could either buy a car through your limited company or reclaim fixed mileage costs from your company while using the vehicle for business purposes.
Whatever decision you take, you need some information on your available options beforehand.
So, what determines the amount of tax you pay on a company car?
Several factors determine the amount of tax you pay on a company car.
- List price of the car
- Whether your company pays for the fuel
- CO2 emissions of the vehicle
- Type of fuel the vehicle consumes
- Personal income tax band the vehicle benefit costs fall into
And how are company car benefits taxed?
Usually, you pay an income tax charge on the value of the benefit you receive during the year (benefit in kind) if you are provided with a company car.
Your company may also have to pay Class 1A Employer National Insurance Contributions on the value of the benefit.
Additionally, you will also need both the list price along with the CO2/gcar emissions to calculate the charge
How can you calculate your car benefit charge?
You can calculate the car benefit charge by multiplying the list price of the car by a fixed rate percentage.
The following chart shows company car tax bands from 6 April 2020:
For instance, a car with a £20,000 list price and CO2 emissions of 100g/km will have a car benefit charge of 25% of the list price for FY20-21 equaling (£20,000 x 25%) = £5,000.
This will then be multiplied by the personal income tax band the charge falls into.
It could be basic (20%), higher (40%) or additional (45%).
In case you are classified as a basic taxpayer, you will pay an additional income tax of 20% x £5,000 = £1,000 (£2,000 if the rate is higher).
Additionally, your company will have to pay Employer’s Class 1A NICs on the value of the charge i.e. £5,000 x 13.8% = £690.
What happens if your limited company also pays for the fuel you use?
To calculate this additional charge, you first use the same CO2 based percentage (25%) and multiply it by a fixed amount (calculated as £24,500 in FY20-21) = (£24,500 x 25%) = £6,125.
You then multiply it by the personal income tax band the charge falls into.
For example, if the charge falls into basic (20%), you will pay an additional income tax of £6,125 x 20% = £1,225.
Furthermore, your limited company will incur a further Employers’ Class 1A NIC liability of 13.8% x £6,125 = £845.25.
Are there any important considerations that need to be kept in mind for taxation of company cars?
You should keep the following points in mind to determine the taxation of company cars:
- Usually, salary and other taxable benefits are taxed after the personal allowance and before interest and dividends are added – which will determine the tax band the car charge falls into
- Capital cost of buying the vehicle is offset against your Corporation Tax bill via capital allowances. As it is spread over vehicle’s life, you end up paying less tax overall
- You cannot normally reclaim the VAT element on a new car purchase, but you can reclaim the VAT on any running costs
- You or your accountant should inform the HMRC if you have acquired a company car within 28 days of the end of the relevant tax year – which will result in a change of your tax code along with the additional tax payments to be collected by the PAYE process
- There are many other variables and considerations for taxation of company cars and the above examples are quite simplified
Does your car benefit charge change if your company leases a car instead of buying one?
No. However, your company will be able to claim 50% of the VAT payable if it leases a car.
For instance, if the leased car cost £500 + VAT per month, the company can claim 50% of the VAT charged (50% x 100) = £50 per month.
Is using your own car advisable?
To answer this question, you need to first compare and evaluate the:
- Cost of buying and running your own car (out of post-tax income), and reclaiming fixed mileage rates from your company
- Cost of buying and running a company car (out of company income), plus the additional personal tax and Employer’s Class 1A NICs
With that said, it might help to understand that the cost of buying and running a car via the company along with the additional NICs will generally be offset against its Corporation Tax bill – as will be any fixed mileage rates you reclaim from your company (if your are using your own car).
For a better understanding, you can input different numbers into Company Car and Car Fuel Benefit Calculator to find out the most tax-efficient way for you and to determine the relative tax cost of various vehicles.
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Lanop Accountants and Tax Advisers for Small and Medium Businesses
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