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.
- 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.