1. Introduction

If your employer provides you with a car and it is available for private use, however small, this is a benefit in kind where your salary from that employment, together with the value of the benefit of the car, exceeds £8,500. Travel between home and work is considered private use.

There can be a benefit on:

a) A car that is provided for private use (however incidental the private use is); and/or

b) The petrol or diesel, if the company pays for any private fuel.

See further below for how these benefits work.

2. Amount of the Car Benefit

The benefit is effectively additional gross salary for the year. You will pay tax on this at your marginal rate of tax, currently 20%, 40% or 45%. The amount of the benefit or additional salary is:

- The list price of the car when new (this includes the cost of optional extras, delivery charges and VAT, but excludes the road fund licence and the first registration fee).

X - MULTIPLED BY

- a percentage based on the carbon dioxide (CO2) emissions from your particular model of car.

The appropriate percentage for a petrol-powered car to be applied to the list price is set out below:

CO2 emissions (g/km)

2016/17 onwards

0 to 50

7%

51 to 75

11%

76 to 94

15%

95 to 99

16%

100 to 104

17%

105 to 109

18%

110 to 114

19%

115 to 119

20%

120 to 124

21%

125 to 129

22%

130 to 134

23%

135 to 139

24%

140 to 144

25%

145 to 149

26%

150 to 154

27%

155 to 159

28%

160 to 164

29%

165 to 169

30%

170 to 174

31%

175 to 179

32%

180 to 184

33%

185 to 189

34%

190 to 194

35%

195 to 199

36%

200 & above

37%


The following points are relevant in connection with the percentage:

(i)
Minimum % charge
7% (zero emission cars are no longer tax free)
(ii)
Maximum % charge
37%
(iii)
In between
Increases of 1% for every 5gm/km of CO2 emissions
(iv)
Diesel Cars
A supplement of 3%. This is because diesel cars pollute local air quality, even though they emit less CO2 emissions. The percentage is capped at 37%.

Further Additional Notes:

a) The benefit will be reduced where you contribute towards the cost of the car or pay your employer toward the cost of private use.

b) The benefit will also be reduced where the car is unavailable for part (usually at least a whole month) of the tax year

What about a Pool Car – doesn’t this avoid having a taxable benefit in kind?

It’s tempting to think that if a car is generally available to anyone who needs to drive it, it must be a pool car and therefore not taxable as a benefit in kind on anyone. Sadly this is not often true. To be exempt, the car must be one which is:

  • Actually used by more than one employee or director
  • Not ordinarily used by one employee or director to the exclusion of all others
  • Not normally kept overnight at or near the home of a director or employee (except where it’s kept overnight on premises occupied by the employer)
  • Not used by anyone for private (including home-to-work) travel at all (except for private use which is "incidental" to business use, such as taking a car home overnight in readiness for a business trip starting very early the next day)

The rules are notoriously and strictly applied. Be prepared to prove, if challenged, that they are met.

3. Car Running Costs

If the car is provided by a company, the company can put all the car running costs, except petrol/diesel receipts, through the profit and loss account, thus saving corporation tax at 20% on these costs.

The costs which can be claimed include:

- Servicing and maintenance
- Insurance
- Road Fund Licence
- AA or RAC costs

4. What about Petrol/Diesel Costs?

If you put petrol or diesel receipts through the company accounts, you will be taxed on a “Fuel Benefit” as well as the car benefit. This is because it is deemed that the fuel is used for private as well as business mileage. The fuel benefit is also treated as additional gross salary and taxed at your marginal tax rate.

The fuel benefit is a fixed amount dependent on 2 factors:

a) A fixed amount of £22,200 for 2016/17 (£22,100 for 2015/16)

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b) The same percentage based on CO2 emissions from your car, as for the car benefit.

Thus, a diesel car with a CO2 emission of 205 would have the following additional income:

£22,200 x 37% (37% + 3% = 40%, but capped at 37%) = £8,214

For a basic rate 20% taxpayer, this means additional tax of £1,642.80.

For a higher rate 40% taxpayer, this means additional tax of £3,285.60.

The fuel “benefit” is rarely worth having

In order to make the fuel benefit worth having, you would need to drive a huge number of private miles a year in the company car. In the Appendix, I have set out the calculations you can go through to consider the true annual cost of private petrol and whether it is a benefit worth having.

It is quite easy to avoid the penal fuel benefit. To avoid the penal fuel benefit, you must ensure that no petrol/diesel receipts are put through the accounts. If by accident, any receipts do go through the accounts, all these items should be treated as private payments within the company accounts. Alternatively, you will need to reimburse the full cost of all private petrol to your employer. This is an onerous test. If just one gallon of petrol remains paid for by your employer, you will still be taxed on the full fuel benefit.

However, instead of claiming actual petrol/diesel costs, you can claim a pence per business mile (between 9 pence and 20 pence per mile depending on cc capacity and whether petrol or diesel) using HMRC’s published “advisory fuel rates” which are set out on their website –see link http://www.hmrc.gov.uk/cars/advisory_fuel_current.htm

These advisory fuel only rates are changed regularly (approximately every 3 months) as petrol prices change. Note these advisory rates are entirely different from the approved mileage rates published by HMRC for business use of personally owned cars (see 8. below for these details).

5. Are there any other tax costs of the car and fuel benefits?

Yes. The employer has to pay 13.8% of the benefit amount each year. This is called class 1A National Insurance. It is simply a form of tax on the employer.

This is reported through the company forms P11D(b) and P11D.

6. Capital Allowances on Cars

In addition to getting tax relief on the running costs of the car, tax relief can be obtained on the capital/purchase cost. This relief is through “Capital Allowances” which take the place of commercial depreciation.

The current rates of allowances are also determined by the car’s CO2 emissions as follows:

The current rules

CO2 Emissions

Capital Allowances Available

Allowance Due

75 g/km or less (95 g/km if bought before 1 April 15)

First Year Allowance (if car is new or unused)

100%

76 g/km – 130g/km (110 g/km-160g/km if car bought before 1/6 April 13)

Expenditure goes into the main “plant & machinery” pool (unless for a sole trader or partner where there is private use) with an annual “Writing Down Allowances” (WDAs)

18%

131 g/km or more (161 g/km or more if bought before 1/6 April 13)

Expenditure goes into a special rate pool (unless for a sole trader or partner where there is private use) with annual WDAs

8%


For details of the vast range of low CO2 emission cars now available, go to http://carfueldata.direct.gov.uk/search-company-car-tax.aspx

To view the cars in each band, you first need to click Find new cars by company car tax band. You then click in the CO2 bands in the right hand column on the orange numbers, e.g. on 51 - 75 g/km. You’ll see some nice cars there made by Toyota, Mercedes Benz and even Porsche.

The 100% tax relief on the full capital cost of a new car is the one thing that possibly makes the car benefit charge possibly worthwhile (but with this only being available on cars with 75g/km emissions, this is less the case than before 2015/16 when the limit was 95g/km).

Where you get the 100% tax relief in year 1, note though the company will pay corporation tax at 20% on the market value/selling price of the car when the car is sold or taken over by the director personally. This effectively means that over the period when the car is in the company’s books, the company gets tax relief on the difference between the original cost and eventual selling price.

Cars owned by sole traders or partnerships that have an element of non-business use, are dealt with in a single asset pool to enable a “private use” adjustment to be made.

Car or van?

It is important to distinguish between a car and a van because the above rules only apply to cars. Expenditure on vans qualifies for the annual investment allowance whereby the company gets a full 100% deduction against its business profits for the cost of the van, regardless of the cost or emission levels.

For capital allowances, a car is defined as a mechanically propelled vehicle except a vehicle:

a) constructed in such a way that it is primarily suited for transporting goods of any sort, or

b) of a type which is not commonly used as a private vehicle and is not suitable for use as a private vehicle.

For VAT purposes a vehicle which can legally carry a payload of 1 tonne or more is treated as a van. Thus, “dual status” vehicles, such as some ‘double cab’ pick-ups can enable you to recover the VAT, as well as getting 100% tax relief on the capital cost.

7. Leasing a Company Car?

For cars leased, as opposed to purchased, there is a fixed 15% disallowance of relevant lease payments for cars with emissions above 130 g/km.

If you enter into an operating lease, you don’t get the 100% tax relief on cost price – this is because the car never becomes yours and so is not an asset of your company. Instead, the full costs, exclusive of 50% of the VAT, goes through the profit and loss account as a cost of the business and reduces the profits and in turn the corporation tax by 20% (assuming CO2 emissions of less than 130 gram/km). Only 50% of the VAT is usually recoverable. The non-recoverable 50% of VAT is deemed to cover any VAT relating to any private use of the car. With operating leases, you can select whether the lease payments include ongoing maintenance/servicing or not. Other costs such as insurance can go through the profit and loss account as well and are allowable in full. Re fuel/diesel costs, you are best advised to claim HMRC’s advisory rates rather than put through actual receipts (see 4. above).

If it is a lease purchase or HP purchase, or purchase with cash or via a bank loan, and the terms of the agreement state that the company actually acquires the car at the end of the lease or HP purchase term, then we capitalise the car in full on day 1, despite the car not being paid for in full then. This means you do get the 100% tax relief on the cost price where the CO2 emissions are 75 or less gram/km.

Beware if you lease a car for your use and you reimburse the company every penny of the leasing cost - you still end up having a taxable benefit - irrational and illogical, but true. A number of tax cases have demonstrated that in such cases the appropriate "scale charge" benefit remains in place. At best, the taxable benefit is reduced pound for pound by the amount you reimburse, but even that reduction should not be taken for granted and is dependent on your jumping through some hoops. The sting in the tail is that, in general, the "scale charge" for a car is nowadays likely to exceed the cost of leasing it - so even if you reimburse the full leasing cost it is likely that you will be left with some residual charge to tax.

8. Alternative to a Company Car

The alternative to putting a car through the company is simply to claim 45 pence per mile for the first 10,000 business miles in a tax year and 25 pence per mile on miles in excess of the 10,000 for using your own personal car for business. This is simple and straightforward - the pence per mile that is paid is tax deductible for the company, thus saving corporation tax at 20%. The receipt of the pence per mile by you as director/employee is not subject to tax in your hands.

The 45 pence per business mile is meant to cover all running costs of your own car, namely insurance, maintenance, MOT, Road Fund Licence, petrol/diesel and depreciation. Thus 45p per mile is probably inadequate where you have a larger car which is not particularly fuel-economic. The 45p per mile may mean you make a small profit where you run a smaller, more fuel-economic car.

9. Conclusion

In general, it is only worth bringing a car into a company if it is a new or unused “low” CO2 emission car and the company gets the 100% tax relief on the capital purchase.

If this is not the case, the high personal and company tax payable on the car benefit generally mean the car should be bought and run personally.

Payment of higher dividends out to you as shareholders, or the company offering a cheap or interest free loan to you are the ways to help you purchase a replacement car personally.

The fuel benefit charge is rarely worth having and can be avoided if you use the advisory rates (if a company car) or the approved rates (45p per mile for cars owned personally).


This fact sheet is for information only. It provides an overview of the regulations currently in force and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore, no responsibility for loss occasioned by any person or refraining from action as a result of this material can be accepted by the authors or the firm.