If you operate as a sole trader or partner and purchase a car, whether through your business or not, you make a claim against your self-assessment tax bill to cover the costs of your business mileage. (See using your own vehicle for work section). But providing a car for an employee means it becomes, in the eyes of Inland Revenue, a taxable benefit, therefore the employee given the car, will have to pay an extra slice of tax on it which, as the employer, you have to determine Under the new tax regime introduced in April 2003 the tax a company car driver will have to pay is no longer based on the amount of miles they put in but instead how environmentally friendly the vehicle is. This has changed from year to year, according to the Budget, but the continuing trend has always been towards encouraging business drivers to buy fuel-efficient cars. The starting point for car tax is to work out the value of the car. This is the list price of the vehicle plus delivery charges, taxes, VAT, car tax, and any accessories. If you don’t have this to hand the best thing to do is contact the manufacturer or leasing company. However the list price can be reduced. For example, if the employee has put some of his or her own money into the car, it will be cut in direct proportion to the amount invested. The price can also be brought down if the car has only been available for a part of the tax year. So if the list price of the car was £12,000 but it has only been available for three months then the amount on which it will be taxed gets reduced to £3,000 The next step to working out the tax the employee will pay is based on the level of carbon dioxide the car produces. The minimum charge is 15 per cent of the list price for those vehicles, which emit carbon dioxide at, or below, the qualifying level. For 2004/2005 this is 145g/km but as cars become more fuel-efficient it will be reduced over the coming tax years (in 2002/2003 the starting figure was 165g/km, in 2003/2004 it was 155g/km). This charge will then increase in one per cent steps for every additional full 5g/km over the 145g/km level up to a maximum of 35 per cent. Diesel cars will pay an additional supplement of 3 per cent. To find out the car’s carbon dioxide level you can search the Vehicle Certification Agency’s website but for cars registered in the UK after March 1, 2002, the emission figures should be shown on the registration document. Cars which were registered before January 1,1998 are taxed according to their engine size; up to 1400cc at 15 per cent, then up to 2,000 cc at 22 per cent and then at 32 per cent for the biggest engines. The last contributing factor will be the employee’s income. They do not pay tax on the full benefit of the car, instead you are taxed at the rate of your overall income. Confused? Still awake? Well it is tax we’re talking about so let’s take an example.
Mrs Jones buys a Ford Focus estate 1.8 TDCI for £15,000 for her employee Mrs Smith who puts £2,000 of her own money into it. According to the car’s documentation its carbon dioxide emission is 142 g/km. To work out the tax Mrs Smith will pay Mrs Jones, she does the following:
- The emission figure – it falls bellow the 145 g/km threshold so the percentage charge will be 15 per cent in this case.
- The list price – this is reduced from £15,000 to £13,000 because Mrs Jones put in the £2,000 herself. £13,000 multiplied by 15 per cent (the emission figure) is £1,950 which is the total cash benefit of the company car.
- Her income – Mrs Smith pays income tax at 22 per cent, so 22 per cent of £1950 is £429 and that is what she will pay over the year.
As the employer Mrs Jones will have to calculate all this and will have to pay Class 1A National Insurance contributions on the total. This is worked out by multiplying the cash benefit for the employer of the company car, which we found was £1,950, by the Class 1A percentage which is 11.8 per cent. This means Mrs Jones will have to pay £230 to the IR herself.
Alternatively Mrs Jones could decide to offer her employee a car allowance, instead of a company car, to cover her employees motoring costs such as fuel, insurance and wear an tear. Mrs Smith would have NICs and tax deducted from her pay packet and Mrs Jones she would be liable to pay 11.8 per cent the allowance. In either circumstance it would make sense to work out what both these figures to determine what would be the most cost effective for both the employer and employee.
Remember: The amount the employee will pay is the list price multiplied by the emission percentage multiplied by their income tax rate.