If you are an employer who provides a company car to your employees, we thought it would be interesting to quantify the actual Class 1A NIC cost to you. Kevin Ferguson takes a closer look.
Businesses that choose to provide their employees with taxable benefits such as company cars, health insurance and so on, will be aware that a benefit in kind charge is added to the employee’s income and that it is subject to an income tax charge the same as their salary.
Employers will also be aware that the cumulative sum of all the taxable benefits of their employees are subjected to an employers’ National Insurance charge. At present, this Class 1A charge amounts to 13.8% of all taxable benefits provided, which means that the true cash cost of providing £10,000 of taxable benefits is actually £11,380.
Unfortunately, some benefits are not based on an identifiable cost, but on a scale rate applied by HMRC. Of particular concern are car and car fuel benefits for the use of company cars as you will see in our example below.
ABC Ltd, provide a second hand car to their salesperson Susan, the annual cost to the company is calculated as:
• Fuel £200 per month, of which £25 covers private fuel.
• A further £100 per month to cover insurance, repairs and road tax.
• The car was purchased for £12,000 second hand and is expected to be worth £4,000 after 4 years, therefore the expected annual depreciation amounts to £2,000. The cost of the car when new was £19,000.
The company consider the overall annual cost of £5,600 (including depreciation) to be acceptable.
The CO2 rating of the car is 122 g/km, and Susan’s annual benefit in kind charge for 2016-17 is £3,990 (£19,000 x 21%).
21% is the scale rate applied by HMRC to cars with a CO2 rating between 120 – 124 g/km. This means that Susan is only being taxed on £3,990 when the underlying cost of the car for 2016-17 was £5,600.
However, this is not the complete story as the company pays for all of Susan’s fuel, including fuel for her private use. This means the car fuel benefit charge applies and this is based on the following formula: £22,200 x 21% = £4,662.
Therefore, Susan’s total car and car fuel benefits amount to £8,652 (£3,990 + £4,662), when the underlying cost to her employer is just £5,600, meaning that ABC Ltd will have to pay £1,194 in Class 1A NIC, increasing the annual cost of providing the car to Susan is £6,794.
The true rate of NIC payable is therefore 21.3% (£1,194/£5,600*100).
In this particular case, the employee would be strongly advised to pay the company the £25 a month to cover her private fuel. This would mean that the car fuel benefit would no longer apply, and as a result reduce her taxable benefits for the use of the car from £8,652 down to £3,990.
As a bonus, the company Class 1A NIC would also reduce, from £1,194 to £551.
As the true cost of the car is still £5,600, this reduces the effective NIC charge to just 9.8% (£551/£5,600*100).
Additionally, consider that most CO2 bands increased by 2% for 2017/18.
If you are an employer who provides company cars for any of your employees, you really do need to take this advice into account.