Your spouse, who doesn’t work for your company, needs a new car. You could pay for it personally if you declare a dividend, but is it cheaper to get the company to buy it instead?
Company cars
Company cars are usually a tax and cost-efficient perk to have as an employee. The position is more complex if you also own the company providing the car as well as being the driver. You have to take account of the purchase and running costs as well as the tax position for you personally and your business. That said, there is a way to use your company to provide a car for a member of your family in a tax and cost-efficient way.
Example. Kim is a director shareholder of Acom Ltd. She’s buying her husband Lewis a car. Kim, a higher rate taxpayer, has a £14,000 budget which Lewis uses to the full for a new hybrid car with CO2 emissions of 46g/km. Lewis will pay day-to-day costs, e.g. repairs, and insurance. Kim compares the tax position of buying the car from personal funds or having Acom buy and own it.
Personal ownership. Kim expects Lewis to use the car for four years before it’s sold when she estimates it will be worth £6,500. The net cost of the car will therefore be £7,500 (£14,000 – £6,500). Kim will need to take a dividend of £11,320 from Acom to cover this cost. After higher rate dividend tax of 33.75% she’ll be left with the £7,500. This means no net cost to Kim of buying the car. Instead, Acom foots the £11,320 bill.
Company ownership. The cost of the car to Acom over the four years is again £7,500. However, it can claim corporation tax (CT) relief at 19% (assuming the small profits rate applies) which eventually reduces its cost to £6,075. However, as Acom is providing a company car to Kim she must pay tax on it. This amounts to £3,360 over the four years. Kim takes dividends of £5,071, which after tax leaves £3,360. Acom has to pay Class 1A NI on the car benefit, which after CT relief costs £1,020. The total cost to Acom for the car is therefore £12,166 (£6,075 + £5,071 + £1,020). It seems that Kim will be better off funding Lewis’ car personally. However, three simple steps can change the picture.
Making it tax efficient
The first step in reducing the tax and overall cost of the car is to get Acom to pay the running costs. The second step is for Kim to reimburse Acom for these and the third is for Lewis to reimburse Kim.
Tip. It’s vital to the second step that Acom includes a clause in its company car agreement with Kim that she reimburses it the running costs.
The tax reduction. We will assume the average annual cost of insurance, road tax, servicing, etc. is £1,560. If Acom pays this and requires Kim to reimburse it, the corresponding amount on which she is taxed for the car is reduced by an equal amount. Over the four years of ownership that’s a tax saving of £2,496. This means that Kim can take less in dividends from Acom to cover what she pays out on the car. Lower dividends means less outlay for Acom. Lewis’ financial position is neutral; he is just required to reimburse Kim for the running costs instead of paying them direct.
Savings. Passing the running costs through the company is cost neutral for Kim and Lewis but saves Acom a little over £4,000 in four years.
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.