You want to help your young son replace the ancient car he currently drives. The plan is for your company to buy it but for the running costs to be met by your son. That’s fine with him but is there a more tax and cost-effective alternative?
The tax factor
There’s no denying it, cars are expensive whether purchased personally or by your company. What’s more, if your income is derived from your business, tax plays a major factor in the overall cost of the car. The tax consequences are quite different depending on whether you draw extra salary or dividends to personally pay for the car or get the company to buy it direct.
Example – costs personally paid
In considering this scenario there are several tax and NI factors to consider. The best way to do this is to look at a realistic example.
Terry’s son James is provided with a car by Terry’s company Acom Ltd. It’s a brand new hybrid vehicle with CO2 emissions of 114g/km and a list price of £18,500. Terry has budgeted for the car to be sold after four years for £9,000.
Trap. Even though the car is for James, because he’s not an employee of Acom, Terry will be taxed on it as a benefit in kind as a higher rate taxpayer.
Taking all the factors together, namely: the cost of the car, its resale value, the benefit in kind tax, Class 1A NI for Acom, corporation tax relief and dividends it pays to Terry, the net overall cost to Acom after four years will be just under £23,000 (see Further information).
Importantly, this assumes that James pays the running costs, e.g. servicing, tyres, insurance, etc.
Power tip. The company can substantially reduce the overall cost of the car if it also pays for its running costs but is reimbursed for them by James.
Example – costs paid by company
The position is the same as the previous example except that Acom pays the running costs, estimated at £2,195 (mostly insurance) per year, and James reimburses these. The bottom line is that Acom’s overall cost is reduced to under £17,000 (a saving of £6,000) and James’ and Terry’s financial position is neutral (see Further information ).
How is the cost reduced?
The reduction in cost occurs because of how company car benefit in kind tax is calculated, i.e. because it’s reduced by the running costs that James reimburses to Acom. In turn, this reduces the amount of dividends that Acom pays Terry to cover the benefit in kind tax.
Power tip. The reduction in the car benefit in kind is only allowed by HMRC where the company (employer) stipulates that payments for the private use of the car are made to it (see Further information ). The employer should include these terms in its company car agreement with the person to whom the car is provided.
In our example, Acom requires the payment for private use to equal the running costs it incurs. This ensures that it has no financial impact for Terry and James, and Acom benefits from the resulting tax saving.
The tax and NI bill for a company car can be substantially reduced if your company pays the running costs but requires these to be reimbursed as a contribution for private use. For example, this could reduce the overall cost of a company car over four years by £6,000.
Further information
HMRC’s rules for car benefits in kind
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.