Navigating Company Car Taxes: Alternatives to Going Electric
These strategies could be more beneficial ...
Posted by Helen Beaumont on 02/01/2023 @ 8:00AM
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 ...
If you're thinking of trading in your fossil-fueled company car for an electric one, there may be an alternative!
Despite electric vehicles making up only 16.5% of all cars sold in December 2022, the government continues to incentivise their adoption with tax breaks, capital allowances and reduced NI costs.
"However, before you make the switch, consider alternative strategies to lower your tax burden!"
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.
"Yes, electric vehicles can offer tax savings!
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.
Until next time ...
HELEN BEAUMONT
Would you like to know more?
If anything I've written in this blog post resonates with you and you'd like to discover more about the taxation of company cars and whether you should trade in for an electric vehicle, it may be a great idea to give me a call on 01908 774323 and let's see how I can help you.
Helen brings the personal tax planning experience of the top 20 tax companies to Essendon. Formerly of MacIntyre Hudson (with 45 offices nationwide), Helen worked at Chancery for more than 10 years before joining Essendon as the personal tax specialist.
Tax Planning can make a considerable difference to your tax liability. Helen has specialist knowledge and experience in tax planning and uses every opportunity to minimise your tax bill is utilised. By analysing your investments, income, profit and expenditures, Helen will provide strategic tax planning expertise that could offer significant savings, whilst delivering clear, honest advice and guidance.
When Helen is not at Essendon she spends time with her young son and likes going on long walks with the family dog.
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