How much are employees taxed?
For most employees company cars are seen as a benefit in kind, so income tax is payable which is calculated as a percentage of the car's list price based on CO2 emissions. For 2021/22, the rates range from 1% for electric vehicles up to 37% for large diesel cars.
Hybrid cars (below 50gm of CO2 per kilometre) are judged on electric-only range. The 2021/22 rates go from 1% (more than 130 miles) to 13% (below 30 miles).
For example, if you have a £40,000 car with an emissions rating of 30%, the benefit in kind is £12,000. The income tax due is £2,400 for basic rate or £4,800 for higher rate payers.
Mileage driven or the age of the car has no effect on the tax due. The list price can include delivery charges, tax, VAT and factory-fitted accessories, but not vehicle excise duty.
There are a few exceptions and, for instance, pool cars used by a group of employees for work and not assigned to one employee do not give rise to taxable benefits.
Is fuel taxed?
Any free or subsidised fuel provided for private use in a company car or van is liable for income tax. The tax rate is usually the same as the benefit in kind as it is based on the vehicle, not the amount of fuel. The rate is applied to an annual fixed figure known as the "fuel charge multiplier" which is the same for all cars.
The multiplier is £24,600 for 2021/22, so a car with a percentage charge of 10% would attract a taxable benefit of £2,460. This means £492 would be due for basic rate tax payers or £984 for higher rate payers.
What about vans?
Employees who drive vans only pay tax if there is significant private use. The benefit in kind is £3,500 for 2021/22, with no charge for zero emission vans. For shared vans the benefit for each driver is reduced accordingly.
Van drivers are exempt from fuel tax if the van is just used for business. If there is significant private use, drivers are taxed on a benefit of £669 (2021/22).
What are the benefits?
While having a company vehicle means you attract more tax, drivers need to remember they are removing motoring costs from the household budget. Calculate how much you will be saving by not paying for servicing/repairs, insurance, breakdown cover and road tax.
How can I lower my company car tax bill?
Here are a few ways you can reduce your tax liability on a company vehicles:
- Contribute up to £5,000 towards the cost of the car to lower the taxable list price. Not recommended, except for directors/owners in certain circumstances.
- Pay for private and commuting costs to avoid private fuel benefit.
- Sharing a vehicle reduces the benefit due by each employee.
- Electric cars are more tax efficient.
Should I opt for a company car allowance?
Some drivers could gain financially if they choose a company car allowance or extra salary, especially if their company car produces high emissions. Check the details with your company, including mileage and passenger allowances.
If mileage is paid in line with the HMRC Approved Mileage Allowance Payments (AMAP), there is no tax or National Insurance liability. AMAP for cars and vans is 45p a mile for the first 10,000 miles, and 25p a mile thereafter.
If you do not receive full mileage allowances, you can claim the difference as relief on your tax return.
What about employers?
Businesses with a fleet of company cars must pay Class 1A National Insurance contributions (13.8%) on the benefits, based on the taxable value of the cars and fuel. Any tax due on company cars and private fuel is collected through PAYE.
Other things employers need to consider:
- Include car benefits in payroll by registering with HMRC before the start of the tax year (no need for form P46).
- If car benefits are not on the payroll, you must update HMRC about any changes every quarter (form P46), although HMRC take a risk-based approach to charging penalties in respect of any late returns.
- Recover VAT on fuel used for business, even if an employee claims fuel on expenses.
- Firms providing fuel for private use at or below cost can recover VAT, but must then pay VAT using the set fuel scale charges.
Purchasing company cars
Your business can claim the cost of a vehicle purchase through capital allowances, therefore lowering taxable profits. For 2021/22, new cars with emissions below 50g/km are in the main 18% rate pool, while cars with emissions greater than 50g/km are in a special 6% pool.
Here are a few other points for employers:
- You can claim 100% first-year allowances on zero-emission vehicles purchased for business use. Sole traders buying vehicles for both business and private use can only claim the business portion of the allowance.
- Some costs attract full tax relief, such as maintenance and running costs as well as loan interest.
- Companies cannot normally recover VAT on car purchases, unless they can prove it is for business use only. Usually businesses, such as car dealers and leasing firms, are able to recover VAT.
Leasing company cars
Leasing vehicles is an attractive option for businesses who do not wish to purchase their vehicles, but there are still tax implications, including:
- Tax deductions are dependent on CO2 emissions and on accounting treatment.
- Leasing costs shown in the accounts can be deducted from taxable profits as expenses if CO2 emissions are below 50g/km.
- For cars with CO2 emissions above 50g/km, there is a flat-rate disallowance of 15% on the accounts lease cost.
- Usually, only 50% of the VAT charged on rentals can be claimed. However, you might be able to reclaim 100% if the car is only used for business and there is no private use.
- Capital allowances can only be claimed if there is a requirement that the vehicle be bought outright under the hire agreement.
The next steps
If you require professional guidance on the tax implications of company cars, please contact John Sheehan or your usual UHY adviser.
