Why your company car could be costing you

Why your company car could be costing you?

Why your company car could be costing you

A company car scheme is a great incentive for employees, allowing businesses to attract and retain the best talent, but every year the tax and national insurance that goes along with company cars rises, and it could be costing both you and your company more than necessary. If your car is more than a few years old, it may be more tax efficient to transfer ownership to you. Here’s why:

How does company car tax work?

If you have been driving a company car for a while, you will likely to know that the income tax is primarily calculated on the list price of the car was new and when it was first registered approval on its CO2 emissions. The price of the car when new will remain the same, but the CO2 emissions will inevitably creep up year after year. When this happens, it means that your company car is costing you more in tax, and your company more in NI with each year that passes. Meanwhile, as with any vehicle that is being used day-to-day, the value of the car decreases. This is why it can eventually become much more tax efficient for both parties if your company hands the car over to you instead.

What makes this more tax efficient?

Let’s look at an example of this in action to explain how it works:

Jane gets a new car from her company, Acorn Ltd., which costs £28,000 as of April 2014. It is estimated that this car will be replaced in April 2021. At the moment, the car is worth £12,000, and has CO2 emissions of 175g/km. Jane will be taxed on £10,360 in the year 2019/20, and also in 2020/21 (total: £20,720) and Acorn will be required to pay Class 1A national insurance on this amount.

If, instead, Acorn gives Jane ownership of her company car on 6th April 2019 (the beginning of the new tax year), they will only need to pay a one-off tax and national insurance charge on £12,000, saving them money in the long run. As a higher rate taxpayer, this transfer will mean Jane saves £3,488 in tax, and Acorn saves £1,203 in national insurance.

Surely that’s a no-brainer?

For the most part, it is. But while this may seem like a great idea, before you jump ahead and start the process there are a few other things to consider, primarily the cost of running the car as this can affect the cost effectiveness of this plan. If Acorn Ltd. pays the running costs of the vehicle and gets tax relief on these costs, they can continue to do so even after the car has been transferred to Jane. However, this would mean Jane will need to pay tax on these running costs paid by Acorn – why would Jane do this, you ask? Basically, she wouldn’t. To further equalise things and make the transfer fair on both parties, Acorn can pay Jane a mileage allowance for her business journeys, counteracting this tax and making both Jane’s and Acorn’s costs lower overall.

How can my business pay me a mileage allowance?

Imagine Acorn Ltd. pays the running costs of what is now Jane’s car (let’s say £1,600 in 2019/20 and £1,700 in 2020/21). During this period, Jane drives 9,000 business miles, and because she now owns the car Acorn can pay her up to 45p per mile (tax and NI free) to cover the cost of fuel and any other charges she may incur.

If the cost of fuel comes to, for example, 13p per mile, this leaves an extra 32p per mile that Jane can use to partially pay back Acorn for the £3,400 worth of running costs it pays, leaving a mere £520 liable for tax and national insurance.

This of course means that the saving made by Acorn is reduced by transferring the car to Jane, but overall both parties are still much better off than they were previously.

Remember…

  • Look into the tax and national insurance of company cars that are more than a few years old, and identify where there are savings to be made depending on the car’s list price, CO2 emissions, mileage and running costs.
  • Make sure your contract is directly with the insurance company or garage, as this will ensure your tax and national insurance are as cost effective as can be when your company pays the running costs of your own car.
  • When your company transfers the company car to you, they lose an asset, so in the example above, Acorn lost £12,000 from their balance sheet because the car no longer belongs to them, it belongs to Jane. As long as Jane is the only shareholder in Acorn then this won’t matter, but if other shareholders are involved, then this transfer may need to be compensated.

 

If you would like further clarification on the above, or want to find out more about becoming even more tax efficient with your company car setup, get in touch with our team at Price & Accountants to discuss how we can help. We are committed to helping small businesses in London and around the UK with their accounting needs, using Xero online accounting software and our expert team of advisors, all dedicated to helping your business flourish.

How to significantly reduce your tax bill by selling shares to your partner

Looking to become more tax efficient this year? Gifting shares of your business to your spouse is often recommended by small business accountants and tax advisors, in order to make use of both you and your partner’s tax-free allowances, and ultimately minimise the tax on dividends the company pays. This is a great move to make, however if you’re looking for ways to save even more and you also happen to have a mortgage, your accounting firm may not have told you to consider selling shares instead of gifting them. Here’s what you need to know:

Firstly, why is joint ownership best?

Instead of owning your business alone, it is widely considered good practice to own it jointly with your spouse whenever one of you is paying a higher rate of tax than the other. When you both own shares in the company, you are both entitled to use your tax-free allowances, dividend nil rate band, and other rate bands, in order to reduce the tax paid on your company dividends. Owning with your partner is a great way to become more tax efficient.

Should I have made my spouse a shareholder when I formed the company?

If you’re thinking it’s too late to make your spouse a shareholder in your company, it’s definitely not. Even if your spouse was not made a shareholder in the beginning, HMRC will still allow you to transfer ordinary shares to them as a gift in order to reduce your tax bill. No matter how long ago you formed your business, you can start the process of making your spouse a shareholder at any time.

How does this help reduce my tax bill?

Here’s an example of this tax-saving plan in action:

Joe started his company (Joe Bloggs Ltd.) over ten years ago. It has grown considerably since then, and is now being valued at around £600,000. Joe Bloggs Ltd. pays Joe £100,000 per year in dividends, of which almost £50,000 is taxed at the higher rate, and naturally, Joe would like to save on tax wherever possible.

Joe’s wife, Jane, brings in less income, and so Joe’s accountant suggests that he gift half of the shares of Joe Bloggs Ltd. to Jane, in order to make the most of her tax-free allowances and basic rate band.

Tax savings comparison

If you believe you could qualify for tax relief by implementing the plan above, you can discover the savings you could make in your business by filling in your details on our quick form at the link below, and we’ll send you a free, simple table to help calculate.

You can also get in touch by emailing us to info@priceandaccountants.com or call us 020 3735 5119 at Price & Accountants to discuss how we can help you save on your tax this year. We are committed to helping small businesses in London and around the UK with their accounting needs, using Xero online accounting software and our expert team of advisors, all dedicated to helping your business flourish.

 

Limited companies filing deadline

Limited companies filing deadlines.

Limited companies have filing deadlines for accounts and tax returns.

Penalties (for private limited companies) for late filing with HMRC are summarised below:

ACTION                                                                  DEADLINE

  • First accounts with Companies House       21 months after date incorporated
  • Annual accounts with Companies House   9 months after year end date
  • File company tax return with HMRC          12 months after end of accounting

Period

  • Pay Corporation Tax or                             9 months and 1 day after Corporation
  • Tell HMRC that no corp tax is payable     Tax accounting period ends

The penalties (for private limited companies) for late filing of limited company accounts with Companies House are summarised as follows:

TIME AFTER DEADLINE                             PENALTY

  • Up to 1 month                                               £150
  • 1 to 3 months                                                £375
  • 3 to 6 months                                                £750
  • More than six months                                 £1,500

The penalty is doubled if annual accounts are late two years in a row.

Limited companies are required to file a confirmation statement (previously an annual return) with Companies House once a year. The company should receive an email alert or a reminder letter when the confirmation statement is due. The due date is usually a year after either:

  • the date the company was incorporated
  • the date the company filed its previous annual return of confirmation statement.

The company can file the confirmation statement up to 14 days after the due date, with no penalty.

It can be very difficult for a small business owner to understand several deadlines, Price & Accountants can help you to understand of these deadlines. Feel free to book an appointment with us today by completing contact us form or email: info@priceandaccountants.com or call 020 3735 5119

Free Estimate

Name: Price & Accountants Address: We Work, 1 fore Street, London, EC2Y 9DT Call us: 020 3735 5119 Email: info@priceandaccountants.com
Get a Quote