Provision of a company car for key employees, including directors, has always been a popular element of the remuneration package. So, let’s take a look at the pros and cons.
First of all, for the business:
- If the company buys the vehicle it acquires a valuable asset (albeit a depreciating one) which it retains if the employee leaves
- If the car is leased (the favoured option for about 80% of companies) then you’re not having to lay out the cash (purchase price) and you should be able to get back 50% of the VAT on the lease costs. You can reclaim 100% VAT if the vehicle is exclusively for business use. You also don’t incur heavy maintenance costs as the car ages. Beware however – if the car does more than the estimated mileage, you could be facing heavy penalties depending on the excess mileage
- In some sectors (for example those where company representatives traditionally incur regular heavy mileage) you may find it difficult to secure good employees without providing a car
- The burden of calculating the tax payable by the employee on the use of the car falls on you as employer
- As employer, you have to pay Class 1A National Insurance (NI) on the value of the benefit to the employee of having the use of a company car
Now for the employee:
- The biggest benefit is that the employee does not usually have to bear the maintenance and repair costs of the car. On the other hand, if the employee leaves the employment, he is faced with the financial outlay of acquiring a vehicle
- Unless the car is used exclusively for the company business (which means that usually it has to be left at the company’s premises when not in use by the employee), the employee will pay tax on the private use as a benefit in kind (BIK)
- The value of the BIK is not the same as the cost of the car. Every car has a BIK band, based on fuel, type, CO2 emissions, and a P11D value, which is the list price, including extras and VAT, but without the first-year registration fee and vehicle tax. To calculate the BIK tax, multiply the P11D value by the BIK percentage banding and also adjust for the number of days in the year where the car was unavailable to the employee
- The tax paid by the employee depends on the value of the BIK and the employee’s annual salary (excluding the BIK). If you’re a 20% taxpayer you’ll pay 20%, if you’re a 40% taxpayer you’ll pay 40% on the value over the 40% threshold. There is no cap.
- Although BIKs are taxed, the employee does not have to pay NI on the value of the BIK
- If the employer pays for the fuel you use for personal journeys you pay tax (but not NI) on the value of this separately from the tax on the BIK
Suppose the employee contributes towards the cost of the car? There are a few reasons why this might happen – to acquire a more expensive model, or to reduce the BIK tax. This can be a lump sum (maximum £5,000) knocked off the list price, or regular payments (based on how long it is intended to keep the car) which are then knocked off the BIK calculations.
This of course not only reduces the tax payable by the employee but also the Class 1A NI payable by the employer, because the value of the BIK is reduced.
I haven’t included a table for calculating BIK value here, because there’s a handy calculator on the HMRC website, and you’ll also find them on many car dealers’ websites – especially where they want to show how tax-efficient their models are!
If you’d like to discuss this further then please do get in touch.