How much are employees (including directors) taxed?
For anyone working for a recruitment business, company cars are deemed a benefit in kind, so income tax is payable which is calculated as a percentage of the car’s list price based on CO2 emissions. For 2021/22, the rates start from 1% for electric vehicles up to 37% for large diesels.
Hybrids (below 50gm of CO2 per kilometre) are assessed on electric-only range. The 2021/22 rates start from 1% (more than 130 miles) to 13% (below 30 miles).
For example, if you have a company car worth £40,000 with an emissions rating of 30%, the benefit in kind will be £12,000. The income tax due is £2,400 for basic rate or £4,800 for higher rate payers.
The annual mileage or the age of the vehicle has no effect on the tax due. The list price can include delivery charges, tax, VAT and factory-fitted accessories, but not vehicle excise duty.
As always, there are some exceptions and, for instance, pool cars used by a group of employees for work and not assigned to one employee do not give rise to taxable benefits. It’s worth noting there are strict rules around the classification of a pool car so tread carefully if you decide to go down this route.
What about fuel costs?
Any free or subsidised fuel provided for private use in a company car is liable for income tax. The tax rate is usually the same as the benefit in kind as it is based on the vehicle, not the amount of fuel. The rate is applied to an annual fixed figure known as the “fuel charge multiplier” which is the same for all cars.
The multiplier is £24,600 for 2021/22, so a car with a percentage charge of 10% would attract a taxable benefit of £2,460. This means £492 would be due for basic rate tax payers or £984 for higher rate payers.
What are the benefits of company cars?
Driving a company car means you pay more tax, however you will also remove significant motoring costs from your household budget. Calculate how much you will be saving by not paying for servicing/repairs, insurance, breakdown cover and road tax.
Can I reduce my company car tax bill?
Here are a few ways employees and directors can reduce their tax liability on company vehicles:
- Electric cars are more tax efficient.
- If you are a business owner and not looking to purchase an electric car then it may be more tax efficient to purchase the car personally using dividends from the company.
- Contribute up to £5,000 towards the cost of the car to lower the taxable list price. Not recommended, except for directors/owners in certain circumstances.
- Pay for private and commuting costs to avoid private fuel benefit.
- Sharing a vehicle reduces the benefit due by each employee.
Is providing a company car allowance a better alternative?
Some workers can gain financially by choosing a company car allowance or extra salary, especially if their company car produces high emissions.
If business mileage is paid in line with the HMRC Approved Mileage Allowance Payments (AMAP), there is no tax or National Insurance liability. AMAP for cars and vans is 45p a mile for the first 10,000 miles, and 25p a mile thereafter.
If employees do not receive full mileage allowances, then they can claim the difference as relief on their tax return.
What about employers?
Recruitment businesses who provide employees and directors with company cars must pay Class 1A National Insurance contributions (13.8%) on the benefits, based on the taxable value of the cars and fuel. All employee benefits must be declared on their P11D form which is submitted to HMRC on 6 July every year. To find out more about P11D forms please read our guide here.
Other things employers need to consider:
- Include car benefits in payroll by registering with HMRC before the start of the tax year (no need for form P46).
- If car benefits are not on the payroll, you must update HMRC about any changes every quarter (form P46), although HMRC take a risk-based approach to charging penalties in respect of any late returns.
- Recover VAT on fuel used for business, even if an employee claims fuel on expenses.
- Firms providing fuel for private use at or below cost can recover VAT, but must then pay VAT using the set fuel scale charges.
Buying company cars
Your recruitment business can claim the cost of a vehicle purchase through capital allowances, therefore lowering taxable profits. For 2021/22, new cars with emissions below 50g/km are in the main 18% rate pool, while cars with emissions greater than 50g/km are in a special 6% pool.
Here are a few other points for employers:
- You can claim 100% first-year allowances on zero-emission vehicles purchased for business use.
- Some costs attract full tax relief, such as maintenance and running costs as well as loan interest.
- Companies cannot normally recover VAT on car purchases, unless they can prove it is for business use only.
Leasing company cars
Leasing vehicles is an attractive option for recruitment businesses who do not wish to purchase their vehicles, but there are still tax implications, including:
- Tax deductions are dependent on CO2 emissions and on accounting treatment.
- Leasing costs shown in the accounts can be deducted from taxable profits as expenses if CO2 emissions are below 50g/km.
- For cars with CO2 emissions above 50g/km, there is a flat-rate disallowance of 15% on the accounts lease cost.
- Usually, only 50% of the VAT charged on rentals can be claimed. However, you might be able to reclaim 100% if the car is only used for business and there is no private use.
- Capital allowances can only be claimed if there is a requirement that the vehicle be bought outright under the hire agreement.
If you require professional guidance on the tax implications of company cars, please arrange an appointment with us here.