As the tax and National Insurance costs of your fossil-fuel-powered company car rise, it's tempting to opt for an electric vehicle to save on expenses and reduce your benefit-in-kind liabilities ...
First, let's examine the relationship between a car's age, emissions and tax charges. Zero-emission vehicles benefit from significantly lower tax charges, while drivers of non-electric company cars with moderate emissions face steeper tax bills. Older cars suffer the most in this regard.
For example, consider a director who purchased a new company car in 2015 with a CO2 emission of 140 g/km. In 2014/15, the taxable benefit in kind (BIK) was 21% of the car's new list price. By 2022/23, the BIK rate rose to 35%. Assuming a £20,000 list price, the taxable BIK increased from £4,200 to £7,000 over eight years. For a 40% taxpayer, the annual tax bill amounts to £2,800, plus Class 1A NI at 14.53% for 2022/23, likely exceeding the car's value.
To reduce tax costs, the director could either switch to a lower-emission vehicle or transfer ownership of the current car. The latter option entails a one-time taxable BIK equal to the car's market value when transferred. For older company cars, the transfer may occur at a relatively low tax cost.
Using the previous example, if the car is worth £3,000, the tax charge is £1,200 (£3,000 x 40%), which is less than one year's tax bill for retaining the company car. However, additional factors must be considered. Transferring the car from the company to the director might appear tax-efficient, but the impact on future running costs should also be evaluated.
There are two primary approaches to address these costs:
- The company pays the running costs and claims tax relief, while the director is taxed on the cost of the bills as a perk. However, the director can reduce the tax bill by claiming a tax-free mileage allowance for business journeys.
- The company pays the director a tax-free mileage allowance, which the director uses to cover the car's running costs.
The second option has the advantage of avoiding employers' NI on the mileage allowance. Nonetheless, if the director's business mileage is low, the allowance might not cover the car's running costs. In such cases, it's crucial to crunch the numbers to determine the most tax-efficient solution.
However, other strategies may prove more beneficial in certain circumstances. By evaluating the tax implications of retaining or transferring a company car and considering the effects on future running costs, you can make an informed decision that suits your specific situation.
If you'd like to find out more about anything I've written here, do call me on 01908 774323 or leave a comment below and let's see how I can help you.