Having a company car has long been considered a perk of employment coming with the convenience of no unexpected repair bills and possibly no fuel costs. However with changes to the taxation of cars the exact model you choose to drive can be very important.
The annual tax charge is usually calculated based on the CO2 emissions of the vehicle - there has been a shift to provide an incentive for employers to provide lower emission cars. For the tax year about to start 6 April 2017, the percentage on which tax is based ranges from 9% for cars with 50g/km CO2 or below, up to a significant 37%.
This percentage is then applied to the ‘list’ price of the car, plus any accessories. This price is not always what your employer has paid for the car but is the price published by the manufacturer and that applies whether the car has been purchased out of the showroom or second hand.
If your employer also pays for your private fuel, a further benefit arises, based on the same percentage applied to a fixed fuel charge.
For example, a BMW 3 Series with a list price of £35,000 with CO2 emissions of 120g/km would result in a benefit in kind for 2017/2018 of £9,100 plus a further £5,876 if fuel is provided. If you pay tax at 40%, your tax liability would be just under £6,000 per year.
Although the minimum percentage rate is rising over the next few years from 9% to 16%, with effect from 2020/2021 the lowest rate is set to be just 2% for an electric car with a range of at least 130 miles.
A similar priced car falling within these criteria would result in a benefit of just £700, a saving of almost £3,500 in tax on the car benefit alone.
If you do have your heart set on a specific car with higher emissions, the benefit in kind could be reduced by you making a contribution either to the original purchase or for the private use of the car during the year.
However, the taxation implications for your employer could also dictate your choice of car.
Cars with CO2 emissions of 75g/km or less can currently qualify for an allowance of 100% against trading profits in the year of purchase. As this would otherwise be allowed at only 8% or 18% a year, this represents a significant cashflow saving to the business.
New rules are also about to come into full force which give a 100% allowance for expenditure on electric vehicle charging points for your employer.
To decide if the company car route is the best for you, the tax costs above need to be compared with the initial and running costs of owning a vehicle yourself, less the payments that you could claim from your employer for business mileage. These are currently set at 45p for the first 10,000 miles and 25p per mile thereafter.
The cost of getting this decision wrong, both in terms of the initial decision to accept the benefit or on the model driven, could be substantial.