Company cars and Benefit in Kind
A company car is a vehicle provided by the business for business and private use of an employee who usually is required to travel a lot for their role. Company cars have pros and cons from the point of view of both the employer and the employee and this article will explore these.
If employees use their company car outside of work, they would be taxed by HMRC by the employer completing a P11D form. This is called a benefit in kind (BIK). The BIK tax rate on a company car is based on a calculation that takes into consideration the following factors:
- Age of the car
- Fuel type
- CO2 emissions
- Engine size
- The list price of the car
The amount of company car tax you’ll pay also depends on your personal income tax bracket so a 20% taxpayer would pay 20% of the taxable portion of the car’s P11D value and a 40% taxpayer, would pay 40% on the taxable portion of the P11D value. This amount is usually deducted from the employee’s pay by receiving a revised tax code notice from HMRC.
Benefits of a company car
Although there is BIK to consider, a company car may offer a lot of positive benefits including:
- You aren’t personally tied into a financial contract
- Insurance, maintenance and servicing are usually covered by the employer
- There are no depreciation costs as you never own the vehicle
- You get to drive a new model every three or four years
Negatives of a company car
A company car also has lots of downsides to consider, including:
- Restrictions set by the employer may mean that you do not get a choice of vehicle
- Company BIK tax rates can be expensive for high-value vehicles and are linked to the list price of the vehicle not necessarily what the company paid for it
- If fuel is included as part of your package, you’ll also need to pay a hefty Fuel Benefit each month
- You will never own the car
- If you leave your current job, the car of course stays with your employer
- You will also have to ensure your car insurance covers business use commuting
Tax rates on company cars can vary depending on the type of car, the fuel, efficiency, and the cost of the vehicle. Find out how much your desired vehicle may be by checking here.
The alternatives? – Claim mileage for using a personal car
You can claim a tax free allowance for business mileage travelled in your personal car. You can charge your company expenses 45p a mile for the first 10,000 miles and 25p a mile after that (this figure takes into account the costs associated with running a vehicle such as insurance, tax, and repairs). Claiming mileage has no personal tax implications and the company can claim corporation tax relief on these claims. However, if your employer decides you can only claim a lower rate then you can get tax relief for the difference via self-assessment.
Company car allowance
A company car allowance is a cash allowance added to your annual salary, allowing you to buy or lease a vehicle privately. A company car allowance is becoming increasingly popular with employers as an alternative to a company car as it offers the employee the perks of a new vehicle without the employer having the hassle of managing a fleet of vehicles.
There are no set rules as to the amount that your employer will pay you as a company car allowance but it is generally assumed that the cash you’ll be offered will be roughly what your employer would have paid to lease the company car.
While you do not have to worry about company car tax rates with a company car allowance, as the cash alternative is paid as part of a salary, it will be taxed at the normal income tax rate and the contributions from your employer will also be taxed at source, just as your salary is.
What are the pros and cons of a company car allowance?
Once again, it is important to weigh up both the pros and cons of choosing a company car allowance over a company car before deciding whether this option is right for you.
A company car allowance offers many benefits, including:
- You can choose whatever car you want
- If you choose to buy outright, you’ll own the vehicle and can sell it in the future
- If your annual mileage is low, you could be better off financially
- If you already own a car the cash sum may help ease other financial burdens
A company car allowance also has lots of considerations, including:
- You must take the finance out in your own name
- The company car allowance is subject to your rate of personal income tax for the corresponding year
- You will be responsible for paying for your own insurance, maintenance, and road tax
- High mileage (10,000+) can make private schemes expensive
Is a company car right for you?
As the option that saves you the most money is usually the preferred route for most people, it may be helpful to work out the most cost-effective route for you. One way to do this is to take the monthly car allowance being offered to you and deduct any tax or National Insurance contributions. You then need to add in the tax saving of not driving a company car. Compare this to the costs involved in driving a company car and think about whether the money you have left will allow you to cover your remaining motoring costs such as insurance, repairs, and depreciation. Don’t forget to also factor in any fuel benefit offered on the company car.
It is also important to consider your personal circumstances. For instance, if you expect to do a lot of private mileage, you may be better off with a company car allowance than a company car. It also depends on whether you want the security of owning your own vehicle or whether you would prefer to drive a company car to avoid the expense of depreciation.
Deciding whether or not a company car is suitable for you or your business can be determined by several different factors, based on your personal preferences and your circumstances. We can help you determine what’s best for you or your business, as we take a proactive, supportive response in assisting our clients.
To find out more, please contact ProtiQ Chartered Accountants on 01582 797320.
