Company car tax tips

Sep 29, 2021 | Business tax

Should your business be providing company cars? And, if so, what’s the best way to go about it?

Back in the 1970s, when income tax was at its highest, company cars were almost the default, being seen as a tax-efficient perk for employees, along with luncheon vouchers, subsidised social clubs and other such relics.

In the past few decades, though, things have changed and in the 21st century you need to think a bit harder before deciding on your company car policy.

The main driver for change is tax policy, which increasingly discourages employers from payment in perks. But a second influence, not to be underestimated, is climate change.

Let’s look at all of this in some detail.

How does company car tax work?

There are a few different areas of tax to consider when you get a company car. One of those is the relief you might get on the purchase.

Business cars count as a type of capital allowance, which makes them eligible for some tax relief. They don’t qualify for the annual investment allowance, however, and you won’t always be able to deduct the full cost from your profits before tax.

Instead, you’ll need to use writing-down allowances to deduct a percentage of the value of an item from your profits each year.

For cars bought from April 2021 onwards, you can claim allowances as follows:

  • New and unused car with CO2 emissions of 0g/km (or electric car): First-year allowances.
  • New and unused car with CO2 emissions between 1g/km and 50g/km: Main-rate allowances.
  • Second-hand car with CO2 emissions between 1g/km and 50g/km (or a second-hand electric car): Main-rate allowances.
  • New or second-hand, CO2 emissions are above 50g/km: Special-rate allowances.

Another area of tax you’ll need to look at is the ‘benefit in kind’ it represents for your staff. This is a term for any non-cash benefit with monetary value that you give an employee.

Employers and employees pay a tax charge on the value of those benefits, but calculating that value isn’t always straightforward – especially when it comes to company vehicles.

To calculate the benefit-in-kind on a company car, you’ll need to apply a percentage to the car’s value, based on its CO2 emissions. You can find a full table of the percentages that apply for different emissions on GOV.UK.

Is it time to go electric?

You’ll have noticed a lot of talk of CO2 and emissions in the section above. That’s because, as the Government seeks to move the needle on climate change, various incentives for vehicles with low carbon emissions have been introduced in recent years.

Correspondingly, higher tax rates for those with high emissions have also come into effect.

That’s made electric cars an appealing choice – exactly as the Government intended.

Not only do they qualify for more favourable capital allowances (see above) but they also have lower benefit-in-kind rates.

Few decisions should be based solely on a tax relief, however, and there are some downsides to consider.

For example, you might need to assess whether your staff will have access to enough charging points on their usual routes.

You’ll also want to think about whether the extra time spent charging, compared to refuelling, could cause any efficiency problems.

Electric cars also tend to be more expensive up-front than other cars, so you’ll need to ensure the benefits justify any added costs.

Get in touch for advice on company cars.

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