Is a Company Car Tax Efficient?Thinking about getting a company car? We look at whether it's tax efficient...
For a long time, a company car was the way forward. The general consensus regarding company cars was that it was more tax efficient and cost effective, for both yourself and your employer, than if you were to get a car privately.
But is this still the case?
There are some big changes coming to the way cars are taxed, both privately and through a business, in 2017 which means now is the best time to be having this conversation. We want you to be as informed as possible so you know you have made, or are making, the right decision when the new changes come into play.
In this article, we’ll be discussing how company car tax works, how it will change, and if a company car is still tax efficient.
How does company car tax work?
Say you were to get a company car next week, how would company car tax work?
Company car tax is calculated on the following things;
- Your personal tax band
- The P11d value of the car
- The CO2 emissions
The general rule for company car tax is;
The lower the CO2 emissions + P11d value = the lower the company car tax
What is the P11d value?
The P11d value of the car is how much the car is worth after all other costs have been added to it. More specifically, the P11d value is calculated by taking;
- The makers list price
- The delivery charge
- Any other options you wanted added to the specification
- This includes thing such as a sat-nav, privacy glass etc.
- The VAT
And adding it altogether. If you’re wondering how to lower the P11d value then the only answer we can really give you is to go for a car that costs less money. Sorry.
To find out how much company car tax you will be paying you can either read below where we will explain how you can work it out yourself, or you can use a website such as comcar, or get in touch with a knowledgeable vehicle broker who will be happy to help.
If you do fancy doing it yourself, here’s how you do it;
- Take the P11d Value
- Multiply this by the vehicle’s company car tax rate (bands are below)
- This will be your Benefit-in-Kind amount (BIK rate)
- Multiply your BIK rate by your personal tax rate
And there you have it, the result of this will be how much you will be paying yearly in company car tax.
However, the above is if you got a company car tomorrow, or next week, or pretty much anytime up until April 2017. Because after that, it will all change. Which is what we’re going to talk about next.
Company Car Tax Changes 2017
If you are looking at getting a company car in or after April 2017, then how your company car tax is calculated will change.
From April 2017, there will be fifteen more bands introduced and eleven of these bands will apply to low-emission cars. These new bands mean that even if you have an electric car, you will have to pay company car tax. We’ve provided a table of the old BIK rates and the new BIK rates below so you can compare the two, and see how they’ve changed.
However, that’s not all. There will also be changes to how salary sacrifice schemes are taxed. Currently, salary sacrifice schemes are taxed less, if at all, than their cash equivalent. This will no longer be the case. Things such as gym memberships, laptops and company cars, will be taxed the same as if you were given the cash equivalent. This means that you could be paying one of two amounts as company car tax; the BIK rate (as per normal), or as if you were given the money in cash.
This hasn’t gone down well, as you can imagine. The BVLRA have stated that these changes will negatively impact those who have a low emission car. This is because their BIK rates are going to be lower than their cash equivalent so they could end up paying considerably more than they were before. This means that those who have gone for a low emission car are being unfairly punished.
There is one good thing though, and that is that ultra-low emission vehicles are exempt from this change. This means that they will be taxed in the current way regardless. Ultra-low emission vehicles are vehicles that emit 75g/km of CO2 or less. You can read everything you need to know about ultra-low emission vehicles here.
So, those are the changes to company car tax. Due to these changes, you can understand why getting a company car might not be as tax efficient as it once was. However, there are still benefits to a company car, which is what we’re going to talk about next.
What are the business benefits of leasing a car?
When you lease a car through a business, you are able to enjoy some benefits that those leasing privately do not.
If you are leasing your car through a VAT registered company, then you can claim 50% of the VAT back on the monthly payments. If you are leasing a van, you can claim 100% of the VAT back.
And, with a business contract hire, then the finance commitments can be “off balance sheet”. This means that the liability of the finance doesn’t appear on the company accounts.
You may want to keep these benefits in mind when deciding whether getting a company car is tax efficient. And don’t forget you don’t have to lease a car, you can go through a finance scheme for your company vehicle and still have access to all the benefits. You can find out more about that through our finance page.
Changes to VED Rates 2017
Company car tax isn’t the only car tax that’s getting a shake-up this year. There are also changes to how much private car owners have to pay in tax.
It’s stemmed from the same problem the government are having; that too many people are investing in efficient cars. When the current rates were introduced, your average car produced 178g/km of CO2. A new band was introduced to encourage people to go for lower emission cars with the incentive of removing their tax contribution.
It worked, but a little bit too well. Now, the average car emits 125g/km of CO2, and this is set to reduce even further to 95g/km of CO2 in 2020. So, more bands on the lower end of the scale have been introduced. They’ve also shuffled some of the higher bands around, so it’s a bit more ‘fair’.
Essentially, we can summarise it as follows;
First year: How much you will pay in tax will depend on the amount of CO2 your car emits (see table below)
Second (and subsequent years): £140
Any car worth more than £40,000: You will have a £310 supplement on top of the standard rate.
So, even personal tax rates are getting an overhaul.
Is a company car tax efficient?
It’s a big question, and one that is up for debate.
As it stands, yes definitely. Company cars are taxed less as a salary sacrifice scheme and if they are under a certain emissions band, then you could be exempt from company car tax altogether. Plus, your company car can either be “off balance sheet” or you can claim back the VAT (depending on which contract you choose).
However, come April, it may not be as tax efficient as it is now. If you want to take advantage of the changes to how the salary sacrifice schemes are taxed, then you will need to look at an ultra-low emission vehicle. You will still pay company car tax, but considerably less than if you were to get a car that is low in emissions but could be subject to being taxed as if it was cash. Also, there are some ultra-low emission vehicles that are expensive, such as a Tesla or a Porsche Panamera or the Mercedes S-Class. Therefore, if you chose to lease or buy these cars privately, you would have to pay more in taxes than if you were running the vehicle as a company car.
A company car has plenty of advantages that aren’t just taxed based, however. Even though tax has gone up for many, it would still be hard to run a similar vehicle privately than it would through business. For example, running and insuring it is often cheaper to do through your business rather than privately.
There’s no definitive answer to this question, and whether you choose to get a company car or not is completely up to you. However, with the new changes to car tax coming into effect, a company car may not be as tax efficient as it once was.
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