If you’re driving an old petrol company car, you and your company could be paying a lot in tax and NI charges. You could purchase a new electric or low emissions car, but is there a cheaper way to cut your tax bill?
Tax breaks for electric cars
Whilst sales of electrically powered cars hit a record in December 2022, they still only represent around 16.5% of all cars sold. The government has been encouraging businesses to go electric by providing tax incentives in the form of speedier tax deductions (capital allowances) for the cost of new electric cars and low tax and NI bills for all electric cars. Meanwhile the tax cost of most fossil fuel powered cars increases year on year.
Middle of the road cars
Zero CO2 emitting cars qualify for especially low tax charges. Drivers of company non-electric cars with moderate emissions face a disproportionately higher tax bill and those with older cars are worst off.
In 2015 a director bought himself a new company car which emitted CO2 of 140 g/km. The annual taxable benefit in kind for 2014/15 was 21% of its new list price. For 2022/23 it’s 33%. Therefore, assuming the list price when new was £20,000, the taxable benefit in kind was £4,200 eight years ago, but in 2022/23 it’s £6,600. As a 40% taxpayer the director’s tax bill is £2,640, plus his company pays Class 1A NI (14.53% for 2022/23) on top. The total annual tax and NI cost probably outstrips the value of the car.
Change of owner
It’s not tax efficient for the director above to keep driving the ageing company car. The alternatives are to replace it with a lower CO2 emissions vehicle, perhaps an electric one, or transfer ownership of the current car to himself. This counts as a taxable benefit in kind equal to the market value of the car at the time it’s transferred.
If you’re driving an old company car it can sometimes be transferred at a relatively modest one-off tax cost. In our example, if the car is worth say £3,000, the tax charge is £1,200 (£3,000 x 40%) which is less than a single year’s tax bill for continuing to retain the car as a company vehicle. However, there’s more to it than this.
While it might seem tax efficient to transfer the car from the company to the director, the effect on future car running costs must be considered. There are two ways to tackle these:
1. Your company can pay the running costs and get tax relief for them, but you’ll be taxed on the cost of the bills as a perk, though this is still likely to be cheaper than paying the car benefit tax. Plus, you’ll be able to reduce the tax bill by claiming a tax-free mileage allowance for your business journeys.
2. Your company can pay you the tax-free mileage allowance and you can pay the car bills.
The second option has the advantage that employers’ NI isn’t payable on a mileage allowance paid by your company. However, if you don’t drive much on business, the mileage allowance might not be enough to cover the car running costs. You should calculate which is the most tax-efficient option for you.
Older fossil fuel powered company cars are increasingly tax inefficient. If you are a director shareholder, you could consider transferring the car into your personal ownership to improve tax efficiency. Your company can still pay the running costs or a tax and NI-free mileage allowance for business journeys. Calculate which is more tax efficient for you.
If you would like further advice do get in touch with JRW to fully discuss the implications.