A Taxing Decision
Taxation is a key factor when buying a company car – here’s all you need to know to map the road ahead
The single biggest driver of company car decision-making, and the most influential financial factor, is a car’s CO2 emissions. Measured in grams per kilometer, the figure is defined by a European test result before a car goes on sale – a driver’s company car taxation, an employer’s national insurance contribution and the Vehicle Excise Duty, or road tax, are all defined by that figure. Intrinsically linked to a car’s efficiency, it also gives a strong guide as to the fuel cost that both driver and company can expect to incur, compared to rival models.
Benefit-in-kind taxation (BIK) is the tax a driver pays for the privilege of being given a company car. As an employee benefit, the company car is taxed on an equation of vehicle cost and efficiency, so a cheap, low-emitting vehicle will minimise tax obligation, while an expensive and inefficient one will leave the driver facing a large tax bill.
The Government has the system set up in bands, so cars fall into different percentages of their P11D price – the list price of the car including VAT and delivery charges but excluding first registration fee or road tax – depending on the CO2 figure. At present, the lowest band for conventional petrol or diesel vehicles is the 11 per cent group for those under 95 g/km emissions. The basic rule of BIK is that low emissions and a lower P11D price are the best way to keep HMRC away from your pay packet, while of course making sure the car is appropriate for the job in hand.
While BIK taxation is the big deal for drivers, for companies it’s National Insurance that should be a prime focus but is sometimes forgotten. Fortunately the priorities dovetail with benefit-in-kind, in that it’s P11D price and CO2 emissions that define payments. Any car that is available for employee’s private use, be it a company car or a pool car, is exposed to National Insurance. Only vehicles that are solely for business use, such as service engineers travelling to appointments or pool cars for employees to travel to a temporary workplace, are exempt, and it’s also worth bearing in mind that National Insurance is also payable on so-called ‘free fuel’ given to drivers for private mileage.
VEHICLE EXERCISE DUTY
Predictably, given the Government’s taxation regime, Vehicle Excise Duty (VED) is also CO2 emission based. There are 13 bands lettered from A-M, with the lowest, sub-100 g/km cars, being exempt from VED payments, while the M band for cars over 255 g/km incurs an annual £500 bill for road tax. This can be paid either annually or in six-month installments, the latter working out 10 per cent more expensive over the year.
The exception is the first tax disc. To encourage people into lower emission cars, the Government has introduced a separate set of charges for the first registration year. The accountant will be very happy with a fleet of cars that are 95 g/km or under though still in the same 13 CO2- based categories. All band A-D vehicles, that’s everything up to 130 g/km, are free for the first year, but the charges ramp up heavily from there, to the point where 255 g/km cars and above cost a whopping £1,090 for the first year VED.
As of October 2014, there is no need to display your paper tax disc in your car.
WRITING DOWN ALLOWANCE
Companies are able to claim capital allowance on equipment for business use, enabling firms to write down the cost against their taxable income. For cars, this, like all the other tax policies, is CO2 based, but the decisions can have major ramifications for companies that buy their vehicles outright rather than leasing them.
Taking very low emission cars is a massively advantageous move, because anything under 96 g/km of CO2 emissions is eligible for a 100 per cent first-year write-down allowance. That compares with 18 per cent per annum for cars of 96-130 g/km, and just 8 per cent, per annum for cars over 130 g/km. So cars bought outright that are over 130 g/km are something of a balance sheet liability, while the accountant will be very happy with a fleet of cars that are 95 g/km or under.