Offering company cars can be a way of attracting valuable employees, however it can sometimes prove to be extremely costly for employers – so read on and find out all the tax limitations of company cars.
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What could I change?
Switching to electric company cars can save a lot of money for you and your company.
How do I calculate the company car tax for my business?
A private use car is considered as a benefit-in-kind by HMRC and to calculate the tax, a taxable value needs to be calculated firstly. The benefit-in-kind taxable value is the vehicle’s list price multiplied by the benefit-in-kind percentage. If the car was only available for a portion of the tax year, the amount due will be reduced by the number of months the car was not used.
- A car with £40,000 list price and benefit-in-kind percentage of 26% available for 10 months of the tax year would have a benefit-in-kind taxable value of £8,667.
How do I calculate the list price?
A car’s list price is calculated through the following:
- Number plate cost
- Delivery charges
- Added extras
- Modifications that have cost more than £100
What is the benefit-in-kind percentage?
The benefit-in-kind percentage that applies to a car’s list price is set by the Revenue every tax year – the 2019/20 maximum was 37% and is determined by:
- CO2 emissions
- Fuel type (electric, petrol or diesel)
Benefit-in-kind percentage for diesel cars is determined by the real driving emissions 2 (RDE2) standard. If a diesel car does not have the RDE2 standard, an extra 4% can be added up to the 37% maximum.
How do I report obligations?
Once the taxable value has been calculated, it is then reported to HMRC using the P11D form with the employee paying income tax on the value of the benefit at their top rate. The employer is also responsible for paying class 1A employer NICs at 13.8% on the value of the benefit-in-kind and is to be reported on form P11D(b).
What dates do I need to remember?
- P11D and P11D(b) forms both to be submitted by 6th July following the applicable tax year
- 1A NICs by 19 July if paying via cheque
- 1A NICs by 22 July if paying online
What is going to happen in the future?
Overall, it is clear to see why many employers will switch to electric company cars due to the savings that can be made.
- Cars registered before April 6th, 2020 will have frozen tax rates at the 2020/21 levels for the next two years
- The benefit-in-kind percentage for zero-emission cars will reduce from 16% in 2020/21 to 0% from April 6th, 2020
- All zero-emission models have 0% benefit-in-kind, but will rise by 1% over each of the next two tax years
- A regular car with a list price of £40,000 that has 160g/km CO2 emissions that has been registered before 6 April 2020 will have a 37% benefit-in-kind and could give a taxable benefit value of £14,80. This results in an extra £5,290 PAYE for a higher-rate tax payer of £5,290 and class 1A NICs of £2,042. However, a zero emissions car would not attract any additional PAYE for the employee or employer NICs and is also much better for the environment.
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