Tax Factor

01 February 2013

Company Cars – Are they worth the benefit?

A company car is a benefit in kind and is therefore taxable on an employee, provided the employee earns over £8,500 per annum (or generally, if the individual is a director of the company).

The benefit must be recorded on form P11D. The cash equivalent of the car is calculated and taxed at the employee’s highest rate of tax, generally by taxing the individual through the operation of PAYE on the benefit. Employers are also liable to class 1A National Insurance based on the cash equivalent of the car, multiplied by 13.8%.

To calculate the cash equivalent of a car, the list price of the car and any accessories purchased are multiplied by a percentage based on the cars CO2 emissions, which have been summarised in the table below. The taxable value of the car can be reduced by a capital contribution towards the car by the employee of up to £5,000.

The government has announced that all CO2 emission bands will go up 1% in 2014, 2015 and 2016. Therefore in four years time, the CO2 percentage used to calculate a company car benefit for a car currently held by an employee will go up by at least 3% based on current proposals.

There is currently an additional 3% surcharge for diesel cars which is added onto the CO2 percentage when calculating a benefit. The surcharge is currently capped, and so until 2014/15 the maximum percentage applied to the cash equivalent of a car would be 35% and in 2015/16 it would be 37%. Drivers of diesel cars may benefit in the future as the surcharge is being abolished in 2016 which will bring diesel cars into parity with their petrol equivalent.

Car Fuel Benefit

The benefit in kind calculated in relation to provision of private fuel to employees is also based on the relevant CO2 percentages as listed in the table below. It is multiplied by a flat figure, currently £20,200. This is an increase on the previous multiplier of £18,800 which had been the set rate for a number of years. There has been a further commitment to increase the multiplier by 2% above the rate of inflation in 2013/14. The benefit in kind taxable on employees will therefore increase going forward for all cars apart from those with zero emissions.

Unless the employee fully reimburses the company for all private use, a fuel benefit applies. As the CO2 percentages increase, it is worth considering whether the fuel benefit outweighs the actual cost of private motoring, or whether in fact it would be cheaper for the employee to pay for their own fuel and just reclaim mileage costs at HMRC’s advisory rate for business journeys.

Is this helping the environment?

Incentives are being effectively withdrawn for employees to drive electric and low emission cars, as from April 2015, the five-year exemption for zero carbon and ultra low carbon emission vehicles will come to an end. The percentage for zero emission cars will become 9% and the special rules for cars with CO2 of 75g/km or less will be abolished leaving motorists with a benefit in kind based on a 13% CO2 charge from 2015/16.

So are company cars worthwhile?

Although the CO2 percentages are being increased year on year, resulting in corresponding increases in the taxable benefit in kind, there are also a greater number of low emission cars on the market. Having a small, low emission car as part of a remuneration package may still be worth considering and the perceived benefit to the employee may still outweigh the taxable benefit in kind.

CO2 emissions – Applicable percentages for calculating car benefits in kind

If you would like advice on the tax impact of benefits on employees, remuneration packages, or human resource matters please contact your local Wilkins Kennedy advisors.

Emma Lawrence
Corporate Tax Assistant

Romsey & Winchester

t:    01794 515441/01962 852263

e: emma.lawrence@wilkinskennedy.com