Paying Tax on Company Cars

Sometimes in business you need to use a car to get around, whether directly part of the job or for going out and meeting your customers. If you have a limited company it is possible for the company to own a car you can use for company business.

How does a company car affect a limited company?

From the company’s point of view, it is similar to how you would include a car in a sole trader business, so you need to record all of your motor expenses such as fuel, repairs and insurance to set off against your profits.

How does company car affect the individual?

If the car is only used for business purposes there is nothing more to do. If the car is used for private journeys as well it is classed as a benefit in kind (BIK) provided to you by the company. It can even be classified as a BIK by just being available for private use, for example being parked outside your home instead of your workplace.

The result of this is that you will have to pay additional tax as private use of the car is treated as additional income. You need to declare the car along with other benefits in kind on your P11d.

How is tax calculated on company cars?

Before you can tell how much tax needs to be paid you first need to find out the value of the car at the point of purchase. This information is normally found on your car purchase documents.

Next you multiply this by a percentage which is determined by the CO2 emissions of your car. Diesel cars have an extra three percent added to the percentage. The resulting figure is known as the taxable benefit and is taxed at the same rate as income tax. You can find a list of the percentages used in the calculation by checking here.

Fuel benefit for company cars

If the company pays for fuel for the car which is used in private journeys there will be an additional taxable amount known as the fuel benefit. To calculate the fuel benefit you use the same calculation as above, but instead of a list price, you use the figure ,£28,200. Please be aware that the figure of £28,200 is subject to change each year with the budget so be sure to double-check this figure before you do any calculations.

How can I reduce the taxable benefits on a company car?

You can reduce the taxable benefit on a company car in two ways. The first is to use your personal money to assist in buying the car, the effect of this is that the amount you spend from your own funds will be taken off your list price, therefore reducing the benefit.

The other method is to pay towards to running of the car out of your own money which is then subtracted from the calculated benefit for the year you make the contribution in. Both of these methods can reduce the taxable benefit, but please be aware that paying contributions just to reduce tax will likely end up with you spending more money than you save.

The fuel benefit works differently, you cannot pay a contribution to reducing the benefit. If you pay back all of the privately used fuel however, you can remove the fuel benefit entirely. HM Revenue and Customs (HMRC) do have an advisory amount per mile to save complicated calculations on how much fuel was used privately. The advisory figures can be found here.

Please remember that they are just advisory figures and sometimes HMRC may decide you have to pay more or allow you to pay less than these rates. You will need to provide evidence if you wish to pay less, although being asked to pay more is unlikely with engines below three litres in size. The list of the advisory figures can be found by clicking this link.

Is a company car beneficial?

If there is no reason to suspect the car is being used for personal use then there is a distinct advantage through the expenses you can claim along with capital allowances. Once you start using the vehicle privately then this advantage is rapidly reduced by the additional tax you will have to pay personally.

The use of list price for the benefit means if you buy a second-hand car cheap you still have to use a ‘brand new’ price for the benefit. This has a bigger impact when you only use the amount you actually paid when calculating capital allowances.

Cars with lower CO2 emissions will generally have less tax to pay and allow you to claim capital allowances easier. Making it beneficial to opt for a lower emission car where available. Zero emissions or electric will be even more beneficial.

In short, if you do have to use a company car for private use, having a brand new car with very low emissions and paying back any fuel will help reduce the additional tax and hopefully still keep a company car as a benefit to your company.

Company pool cars

A company pool car is a company car available to all employees to make business journeys with. To qualify as a pool car the car must be regularly used by more than one employee, not kept near an employee’s address and only used for business journeys.

If you fulfil the above conditions you do not have to report the company pool car as a benefit and there are no benefits to be paid.

To make calculating any tax due for a company car easier, the official HMRC company car tax calculator can be found by clicking this link. Unfortunately finding the list price of a car can be a difficult task.

If you would like any further help or advice with the above, with P11ds or to see the best way to account for a car in your business, please do not hesitate to contact us.