Company Cars and Tax

3. Reducing Tax Costs

Employees and directors can currently reduce the tax paid on company vehicles in several ways.

3.1 Contribute up to £5,000 towards the cost of buying the car. This decreases the taxable value of the car by the amount contributed.

• You will need to keep the car for several years before you save money. How long depends on the car's size and age, your tax rate and the amount contributed.

3.2 If you pay the full cost of fuel for private travel, including journeys to and from work, you do not have to pay private fuel tax.

For people who only make light private use of a company car there is a strong incentive to pay for their own fuel under the new system. For example:

• For a car emitting 185gm/km, and therefore subject to a 25 per cent charge in 2008/09, a basic rate taxpayer would be paying £845 a year in tax on the fuel benefit, if the employer pays for fuel. If the private fuel they use costs £70 a month or less, they would be better off paying for their petrol.
• A 40 per cent taxpayer driving a car with emissions of 240gm/km giving rise to a 35 per cent charge would have a tax bill of £2,366 in 2008/09 and would have to be using petrol worth almost £197 a month to make it worthwhile accepting fuel for private use from the employer.

3.3 Using alternative fuels or technology lowers the cost of a company car.

• Battery electric cars attract an extra 6 per cent discount bringing the assumed benefit down to only 9 per cent.
• Hybrid electric/petrol cars attract an extra 3 per cent discount whatever their emissions.
• Since April 2006, cars registered on or after 1 January 2000 which are manufactured to run on liquid petroleum gas or compressed natural gas. attract a 2 per cent discount, whatever their emissions.
• From April 2008, there is a 2 per cent discount for cars that can use E85 ethanol fuel.

3.4 Second cars are taxed on the same basis as first cars.

3.5 Sharing a car reduces the benefit each employee pays tax on.

• The value of the benefit for each employee is reduced on a just and reasonable basis. For example, if two employees share a company car equally, normally each of them would be taxed on half the usual benefit.
• If the employees are also taxed on fuel provided for private use, the value of this benefit is reduced in the same way.

3.6 You are only taxed on the proportion of the year you use the car.

Tax due on fuel can also be worked out proportionately if you give up the 'free' fuel and so long as the fuel is not reinstated later.