Question:

“I run a small Limited company which I own 100% and I use my car a lot for business travel. At the moment it is my personal car and I claim mileage but I am considering getting a company car. I have been advised that company cars can work out to be quite expensive for tax but can you explain this through a worked example – the car would be a 2.0l VW Golf with a list price when new of £30,570 and would be purchased outright with cash by the company.”

shutterstock_170834786

Answer

You have been advised quite correctly that company cars can work out very expensive for tax purposes. Year on year the rates charged on even some of the lowest CO2 emitting cars have increased making the benefit less viable.

For the purposes of this example we are going to assume the following:

  • 10,000 business miles per tax year currently claimed back from the company at the official HMRC rate of 45p per mile
  • The total spend on the car is £6,000 per annum including all petrol (both business and personal), repairs, servicing.
  • You are taking a salary from your company to utilise your personal allowance in full but you have enough basic rate band remaining to cover the total benefit or dividends to cover the personal costs of the car.
  • Any personal finance costs and the cost of actually purchasing the vehicle for the company will be removed from the calculations.
  • We are using tax rates for the 2015/16 tax year.

The car in question has CO2 emissions of 165 grams per km and therefore would attract a benefit in kind charge of 28% of the list price, being £8,560 for the 2015/16 tax year. If the company is to pay for all fuel this would attract a further benefit valued at £6,188, giving a total benefit in kind of £14,748.

The £14,748 would be taxed against you personally as income and attract Class 1a national insurance against the company. The total tax charge payable personally will amount to £2,950 for the 2015/16 tax year (20% tax rate x the total benefit).

With regard to the company the national insurance charge is 13.8% of the benefit being £2,035. Therefore total extra tax payable to HMRC for the 2015/16 tax year would be £4,985.

As far as corporation tax is concerned the car would be eligible for writing down allowance of 8% of the cost price on reducing balance basis.

Assuming that you paid the full list price of £30,570 in year one you would be allowed an allowable deduction £2,445, the national insurance suffered along with the running costs of the car would also fall into his category attracting a total corporation tax reduction of £2,096.

Below is set out the key tax and cash flow differences in 2015/16 between owning a car personally and a company car option, as mentioned previously, this ignore the initial cash purchase and just looks at a typical year in the future.

car chart

As you can see from the example above it makes very little sense on a year on year basis to have a company car of this nature as it costs about £3.7k more to put it through the company just for that one year.

A company van would be much more tax efficient than a car so might be worth considering.

Company cars can be an extremely complicated area and even a slight change in circumstances can have a profound tax and cashflow effect. We recommend seeking professional advice before the purchase of any major company asset.