With an increasing number of employers offering employees a company car or car allowance choice – the personal tax position can be a little confusing.
Simply put, if an employer provides a company car and the employee has personal use – regardless of how little, the employee must pay tax on that benefit. Likewise, if an employer provides fuel and the employee uses that fuel for personal use – regardless of how little, the employee must also pay tax on that benefit. Where fuel is not provided but a mileage allowance is paid for business mileage, there may be a tax allowance or charge depending on the circumstances.
Company Car Tax
If an employee has personal use of a company car, HMRC consider that to be a Benefit In Kind and as such apply a tax charge to that benefit.
The Benefit In Kind for company cars is based on the carbon dioxide emissions and a HMRC adjusted list price of the car referred to as P11d value. Different rules apply according to the fuel type and the tax charge can change from time to time.
To calculate how much tax will be charged for a particular car, the employee will need to establish two things;
1. P11d value of the vehicle. This is the recommended full retail price including vat and delivery charges, plus any optional extras with a value over £100 each. For the purposes of establishing a P11d, HMRC exclude the cost of vehicle excise duty (road tax) and first registration fees. The P11d value can be reduced if the employee has opted to personally pay for optional extras and in these cases HMRC would require evidence of such payments.
2. The vehicle’s Benefit In Kind % rate. The Benefit In Kind % rate is dictated by the carbon dioxide emissions of the vehicle – usually expressed in manufacturers marketing materials of vehicle registration documents as grammes per kilometre (g/km). When the emissions figure is established, the Benefit In Kind % rate can be found on this HMRC company car tax table http://www.hmrc.gov.uk/statistics/tax-benefits/tc2b.pdf.
With these two items of information the employee can calculate how much tax will be charged by multiplying the P11d value by the Benefit In Kind % rate. For example if a vehicle has a P11d value of £20,000.00 and a Benefit In Kind % rate of 20%, the calculation would be £20,000.00 x 20% = £4,000.00 of taxable benefit. If the is a diesel powered a 3% additional supplement is added (until end of 2016/2017 tax year, at which point the supplement will be scrapped) and therefore the Benefit In Kind % rate increases to 23% in the example above.
Rules for the various types of fuel are; Petrol engines = standard Benefit In Kind % rate, Diesel engines = standard Benefit In Kind % rate plus 3% supplement, Petrol/Electric hybrid engines = standard Benefit In Kind % rate, Diesel/Electric hybrid engines = standard Benefit In Kind % rate, All electric = zero rated until end of 2014/2015 tax year when a 5% – rising to 7% charge will apply.
How can an employee reduce the tax charge on a company car?
By choosing a lower priced vehicle with lower CO2 emissions.
How can an employee avoid company car tax?
By choosing an all electric powered car or by parking the vehicle at his/her employers business premises at weekends and evenings to ensure no personal use whatsoever. Do bear in mind electric powered vehicles are zero rated only until 2015 when a small charge will then apply.
Fuel Benefit Charge
Employees who receive use of employer paid fuel will be charged tax on that benefit regardless of the level of use or mileage. HMRC use what they call a Car Fuel Benefit Charge Multiplier and the multiplier normally increases every year. In the tax year 2014/2015 the multiplier will be £21,700.00. Therefore if a vehicle has a Benefit In Kind % rate of 20%, the calculation of fuel benefit will be £21,700.00 x 20% = £4340.00
Mileage Allowance Payments
Some employers choose to pay a mileage allowance rather than provide fuel – and some give the employee the choice. HMRC have an Approved Mileage Allowance Payment (AMAP) – a tax free figure which is currently 45p per mile for the first 10,000 miles and 25p for every mile thereafter. However, employers may pay something different – perhaps 30p per mile. Where the total received from the employer is less than the total allowed tax free (AMAP), the employee can claim that difference as a tax allowance. If the amount received by the employer exceeds the tax free (AMAP), the employee will be charged tax on that excess benefit. As an example, lets assume an employer is paying an employee 35p per mile and the employee claims 15,000 business miles, the amount the employee would have received is £5,250.00. This figure is then compared with the Approved Mileage Allowance Payment (AMAP) figure which would be; 10,000 miles @ 45p = £4,500.00 and 5,000 miles at 25p = £1,250.00 total £5,750.00. In this example the employee can claim tax allowance on the difference between what was paid ie £5,250.00 and what could have been paid tax free of £5,750.00.
Company Car or Car Allowance ?
Some employees are offered a choice of a company car or a car allowance. The information above should help you calculate the tax you will pay if you choose a company car and help you consider the impact of employer paid fuel or employer paid business mileage allowance. If you are considering a car allowance – do so with care and full consideration of all the possible expenses and financial risks. A car allowance is a taxable benefit. If you are considering a car allowance and will use it to finance a car – do bear in mind the finance agreement will be remain your liability in cases of redundancy, accident illness or voluntarily changing employment or employment circumstances. When considering a car allowance always budget for expenses for ‘will occur’ and perhaps budget for those that ‘might occur’
Expenses that will occur
- Servicing and maintenance,
- Fully comprehensive motor insurance,
- Vehicle Excise Duty (Road Tax),
- Replacement tyres due to wear and tear,
- Breakdown cover,
Expenses that might occur
- Increase in fully comprehensive insurance premium following a claim,
- Insurance excess payments*,
- Replacement tyres due to punctures or damage*,
- Loss of deposit (if financed)*,
- Car hire in the event of accident repair or theft,
- Price increases in any of the ‘will occur’ items,
- All remaining leasing rentals in the event of a write off*,
- Minor cosmetic repairs to bodywork and alloy wheels*,
* Some of these risks can be insured using products available from www.car2cover.co.uk. Call 01438 870615 to find out more.