One of the perceived benefits of running your own business is the ability to provide you with a company car, with all running costs and depreciation covered by your business.
In reality, it is not that simple and even taking your company car on the shortest route for personal reasons will make you pay additional personal taxes via a benefit in kind, writes accountant Helen Christopher, director of operations at Orange Genie.
Company cars: more taxing than it looks
Unfortunately, in the eyes of HMRC, personal trips include commuting to and from work. This means that using your company car for commuting, shopping at stores, or dropping the kids off at school will require you to pay taxes for the privilege of using the car.
The company car tax is based on three factors:
- Manufacturer’s list price, VAT, delivery charges and optional extras included.
- The amount of C02 emissions produced by the car
- Your personal tax bracket (i.e. 20% or 40%).
How to calculate the tax on company cars
To calculate your tax payable, take the value of your car and multiply it by the company car tax rate for your car’s given emissions.
You will thus benefit from your in-kind benefit rate, which you will then multiply by your marginal tax rate. This tax burden is an annual charge and not just once at the point of purchase. It is therefore important to take this into account when deciding how to finance your next car.
Simply put, the more expensive your car and the higher the emissions, the more tax you will pay. So if you are looking to minimize the tax cost of a company car, consider lowering your car’s value, your emissions, or even consider “going green” and embracing electric technology where the in-kind benefits are high. much lower.
Are you tempted to charge your company for all the fuel for your vehicle? Be aware that personal use of the car then triggers an additional benefit in kind on fuel costs which can add a significant amount to your tax bill!
However, paying for your own fuel and collecting business miles will lower your tax bill. Electricity is not considered a fuel in the same way as gasoline or diesel, so again opting for an electric car will reduce your in-kind benefit.
Can the company car tax be avoided?
The only way to be exempt from company car tax is to avoid using your company car for private travel.
To do this successfully, you will need to leave your vehicle in your work premises overnight and on weekends, to be used only for business purposes. For many entrepreneurs, all of this is inconvenient and does not negate personal car ownership.
But you might consider registering the car as a “pool car”, that is, it stays in the workplace overnight and on weekends, and is shared by other employees for business travel. Again, this can always mean that you need a personal vehicle for family and everyday life!
Interestingly, if the company vehicle has been adapted for “Mobility” reasons, the company car tax will not be due. But be careful because these exemptions will only apply to a small minority.
Take a company van instead …
The tax liability on a company van is calculated very differently from a car. The tax is based on a flat rate of £ 3,150 which is then applied to your personal tax rate. So, for example, a base rate taxpayer will pay 20% tax of £ 3,150, or £ 630 per year or £ 52.50 per month.
This tax may be further reduced if one of the following conditions applies:
- You cannot use the van for 30 consecutive days
- You pay your business to use the van privately
- Other employees use the van
Taxman took note, so you must also
If you are considering a company car, it is worth talking to your accountant to consider all of the options. Once viewed as a job perk, HMRC has steadily increased the tax cost of this “perk” over the past 10 to 15 years, so making sure you understand all the potential pitfalls is critical.