Company Cars: Tax Break or Tax Burden?

Naturally many people are interested in the idea of a company car. We explore the tax issues surrounding the proposition.

As the blog sets out, there are swings and roundabouts to the tax, with deductions for Corporation Tax but charges under P11d. Often the charges outweigh the tax deductions although there is currently a significant tax break available for fully electric cars.

The cost of the car

There is a tax deduction available for all company cars through capital allowances. The amount of the tax deduction depends on the CO2 emissions of the vehicle.

• For new cars with emissions of 0g/km (ie fully electric cars) the full cost of the car is claimable in the year it is bought.*

• For cars with emissions of 50g/km or less an allowance of 18% of the cost per year is claimable.*

• For cars with emissions of 50g/km or more an allowance of 6% of the cost per year is claimable.*

The vehicle must be owned by the company and not simply paid for by the company, in other words the company must be the registered owner.

Whilst the above allowances are obviously welcome, we need to also consider P11d Benefit in Kind Tax (see below).

running costs

All running costs of the car are tax deductible for Corporation Tax. However any running costs that the company pays that relate to personal use of the car will set up further P11d Benefit in Kind Tax charges.

Benefit in Kind tax

Under the PAYE system, Directors and employees who receive personal benefits through their company incur tax through the P11d. This is often called Benefit in Kind Tax.

For Directors or employees with a company car, the benefit of having access to the vehicle is evaluated and the value of the running costs that are paid that relate to personal use are also evaluated. Both the company and the individual then pay tax on the value of these benefits as if they had had the money through PAYE and both Employers and Employees NI is incurred.

The process of evaluating these benefits is complex and affected by the list price of the car, its age, fuel type, engine capacity, CO2 emissions and any contributions made by the individual. HMRC gives us a calculator to help with the calculation: http://cccfcalculator.hmrc.gov.uk/CCF0.aspx

Mostly we find that the amount of P11d Benefit in Kind tax due on company cars puts off most people looking at the idea. For example a car with fairly average emissions of 125g/km the benefit is calculated at 30%* of the list price.

This is the tax charge that mostly means company cars do not constitute a tax break.

Electric Cars

However there is a significant tax break in the form of fully electric cars. To encourage their adoption the Government calculates the benefit at only 2%* of list price.

VAT

VAT is not reclaimable on the purchase of a company car if it is going to have personal use. The only time VAT may be reclaimed is when the car is used exclusively for business.

Conclusion

As we can see there are a lot of variables to consider in the exact tax breaks and tax charges. However, almost always, when we go through the specifics of the car in question we find company directors see no tax benefit in company cars unless they are fully electric.

For fully electric cars, the benefit is clear. There are tax deductions for Corporation Tax and very little charge through P11d.

*All tax rates and thresholds are accurate for the 2022-23 tax year only.