A company car is an excellent perk to give an employee. However, calculating the appropriate tax charge to pay to HMRC can be complicated. There are also considerations to make when choosing a vehicle, as those driving a car with high CO2 emissions will be penalised via a hefty charge.
With tax charges increasing each tax year, we take a look at the details and break down the changes for the 2018/19 tax year.
What is the Company Car Tax Charge?
If a company car is used personally, HMRC treat this as a benefit in kind, i.e. it is deemed to give the recipient a monetary value on top of their salary. Therefore, the employee will need to pay tax on this additional perk via a personal tax charge.
How is the Tax Charge Calculated?
Firstly, the taxable value of the vehicle is calculated by looking at the list value of the car (plus any accessories added) and multiplying this by the car’s ‘appropriate percentage’, which is based on CO2 emissions, with greener cars usually resulting in a lower charge.
Once you have this figure, it is multiplied by your personal tax rate.
Remember, your list value is the value of the car when new, regardless of whether the car was bought second hand.
From April 2018, the appropriate percentage rates have increased, meaning that unfortunately your company car will cost you more than it did last year.
For 2018/19, the appropriate percentage for cars with emissions of 50g/km or less is 13%, compared to 9% for the last tax year.
The appropriate percentage figure then increases depending on emissions as follows:
51-75g/km – 16% (13% for 17/18)
76 – 94g/km 19% (17% in 17/18)
This % increases by 1 percentage point for each 5g/km increase in CO2 emission, to a maximum of 37% which applies to cars with emissions of more than 180g/km.
You can use HMRC’s company car and fuel benefit calculator to work out how much tax is due.
You have a company car with a list price of £20,000. The fuel type is petrol, with CO2 emissions of 150g/km and you pay tax at a rate of 20%.
For 2018/19, the appropriate percentage rate for this emission level for a petrol car is 31%.
Therefore, the car’s taxable value is £20,000 X 31% = £6200.
The tax charge to pay is calculated as £1240 (£6200 X 20%).
What about Diesel Cars?
If you choose a diesel car, expect an extra charge on top of the appropriate percentage rate. From 2018, this supplement is 4% for all cars that aren’t certified to the Real Driving Emissions 2 (RDE2) standard.
Is There a Tax Charge for Electric Cars?
Those using electric cars are rewarded for their green credentials, with a percentage rate of 13% (the same as cars with emissions of 50g/km and below) for those with zero emissions.
New bands will be introduced from 2020/21 which will be based on the distance the car can travel without needing to be recharged, or using the combustion engine.
Fuel Scale Charge
If fuel is provided, then a fuel scale charge is used to work out how much the employee has to pay in relation to their private journeys. The charge is calculated by using the appropriate percentage for the vehicle, based on CO2 emissions and multiplying this by a set amount – £23,400 for 2018/19.
What are the Implications for Employers?
On top of calculating your employee’s tax charge and ensuring this is sent to HMRC, as an employer, you’ll also need to pay Class 1A NICs on the taxable value of the car. As well as ensuring the car is listed on the P11D, you’ll also need to ensure you send a P46 (car) to notify HMRC that you provide an employee with this benefit.
There are benefits for the employer of investing in company cars. If the company owns the car and only uses it for business mileage, then you can claim all the VAT back. If the car is used for any private mileage, then you can’t claim any VAT back at all.
A company car is still a great incentive for employees, but as you can see, there are a range of considerations to make before making a decision.
Get in touch with your local Champion Accountants office today to discuss the most efficient solution for your business.