Could furloughed employees with company cars save tax during lockdown?

Having seen a 20% or greater pay cut, furloughed employees may be keen to do this to help save some money.

Company cars are a taxable benefit to employees, reducing the tax-free personal allowance. The calculation undertaken to work out the taxable benefit takes into account when the car is made available. However, where the vehicle is not made available for 30 consecutive days or more, this period does not count as a taxable benefit.

HM Revenue & Customs have confirmed if employees are able to hand their car back to their employer then it will not count as available.

In addition, recognising under the current circumstances this may not be possible, HM Revenue & Customs have confirmed they would accept that if the keys and fobs are posted back to the employer so that the employee has no access to use the car, and that the employee doesn’t have the authority to request the keys are returned to them, then this will not count as available.

The ideal position would be to have the car returned, however if that is not possible and the keys are posted, an employee should retain as much evidence as possible to support any challenge by HM Revenue & Customs if they wanted to check the position in the future. Keeping records of communication with your employer to agree this, recorded delivery on any postage, a letter accompanying the return of the car or keys with the date and that you do not have the authority to request the car is returned, would all help to support this.

Therefore, if employees are now at home and not able to use their company car, or have another family car they can use instead, then this may seem like a sensible option to reduce their 2020/21 tax bill.

With the government backed scheme supporting furlough until the end of June, by taking action to explore this now, employees could save tax and the saving would largely depend on the list price and CO2 emissions of the car, together with whether private fuel is provided in addition to the car itself.

Whilst there are many variations of company car benefits, from the model, fuel type, age, CO2, if we take a car with a list price of £35,000, diesel, CO2 of 130 , available for a full year with private fuel covered, then this would result in a tax liability of around £3,400 for a basic rate tax payer and £6,800 for a higher rate tax payer. If up to three months were not available to the employee, this could save between £850 and £1,700, depending on which tax bracket an employee falls in (these figures are rounded for illustrative purposes, to give an indication of a potential tax saving based on the details shown).

Whilst an employee would need to seek advice on their position and potential tax savings, this example indicates there are potential savings to be made and therefore employees who are furloughed and not using their company car, would be wise to speak to their employers without delay.