Employees & Company Car Tax

The emissions-based regime for taxing company cars has been in force since April 2002. This page explains how employees are affected under the current system.

Introduction

The provision of a fully expensed car is still a very common employee benefit that has income tax, VAT and national insurance consequences. This brief review of the rules may highlight areas in which savings can be made or liabilities avoided. 'Company car' in this factsheet refers to a car provided for an employee's private use. It includes cars provided to employees, but not proprietors, of unincorporated businesses.

Why provide a company car?

Traditionally this was a very tax effective form of remuneration, although changes over the years have eroded this advantage by increasing the tax liability.

In some cases providing a salary alternative can be beneficial to both employer and employee. It is often a marginal decision depending on the facts of each case and intangible factors, eg peace of mind, may swing the decision in favour of the car.

How is the employee taxed?

The employee is treated as having received a monetary amount equivalent to the provision of the car. This taxable benefit is added to income and taxed accordingly. Usually the recipient's tax code includes the taxable benefit and the tax is collected monthly. Any additional tax is calculated after the end of the tax year.

How is the taxable benefit calculated?

The taxable amount is calculated as a percentage of the manufacturer's list price on the day before the car was first registered and includes the list price of any accessories or options. It is not based on the actual cost, even if the car is purchased second hand. Any excess over £80,000 is ignored.

For cars that are fifteen years old or more at the end of the tax year, the benefit is based on the market value of the car, if this exceeds £15,000. Again, there is a cap of £80,000.

The percentage applied to the list price is graduated according to the level of the car's carbon dioxide (CO₂) emissions. The charge builds up from 15% of the car's list price, at CO₂ emissions of 140g/km, in 1% steps for every additional 5g/km over 140g/km.

The exact CO₂ figure is rounded down to the nearest 5g/km to find the relevant percentage. The maximum benefit is 35% of the list price.

(For example, a company car with a list price of £15,000 and CO₂ emissions of 205g/km gives a benefit of £4,200 in 2006/07, being 28% of the list price.)

Discounts are available for environmentally friendly cars, including electric, hybrid and bi-fuel cars.

Diesel cars are subject to a 3% supplement in recognition of their higher emissions of pollutants that damage local air quality. This supplement cannot take the benefit above the current maximum of 35% of the list price.

All cars registered before 1 January 1998, and cars registered from 1 January 1998 that do not have an approved CO₂ figure, have their tax charge based on the engine size. Details are as follows:

Budget 2006 changes

On 6 April 2008, the starting point for the emissions-based charge will be reduced to 135g/km, so in the example above the benefit will increase to 29% of the list price of £15,000, ie £4,350.

However, cars with emissions up to 120g/km will benefit from a new rate of 10% of the list price, plus presumably 3% for diesels.

Is there a reduction for business use and older cars?

No, the discounts for business mileage and cars over four years old were abolished from 6 April 2002.

Employees who used to receive a discount under the old rules who drove bigger cars with high CO₂ emissions have seen an increase in their car benefit.

What about pool cars?

There is no tax liability for genuine pool cars kept at the business premises for the business use of any employees. There are conditions that HM Revenue & Customs (HMRC) enforce strictly to prevent this concession being abused. For example, any private use must be purely incidental to the business journey.

Is there a taxable benefit for fuel?

Yes, where fuel is provided for private mileage. The car fuel benefit is calculated by applying the same emissions-based percentage as the car benefit and multiplying this by a fixed amount of £14,400. This means that the amount of the fuel benefit charge could be as much as £5,040.

However, if fuel stops being supplied part way through the year, the benefit can be apportioned on a time basis, unless free fuel is resumed later in the same tax year. Under the old system, the benefit was an all or nothing charge, even £1 of private petrol triggered the full benefit.

It can be difficult to prove that fuel has only been used for a business journey. In order to avoid a taxable fuel benefit reimbursement for business miles at an appropriate rate is recommended. HMRC publish advisory rates from time to time.

How are details given to HMRC?

Details should be included on the form P11D which must be submitted by the 6 July following the tax year. Under self-assessment the information must be passed to the employee by the same date. Certain lower paid employees (broadly those earning under £8,500 pa inclusive of benefits) are excluded from the P11D net and the company car may not be taxable on them.

During the year, returns of changes to company cars must be returned on form P46(Car) within 28 days of each quarter end.

What about VAT?

Where employers have reclaimed input VAT on fuel provided free to employees for private use, output VAT should be accounted for on scale rates. The quarterly rates of output tax for accounting periods beginning after 30 April 2005 are:

Where an employer purchases a car to be used as a company car the input VAT is not reclaimable. If it is leased, then 50% of the VAT charged on the rental payments can be reclaimed.

Is there a national insurance liability?

Yes, it is called Class 1A and is paid by the employer. It is payable by 19 July following the end of the tax year. The rate of NIC is the rate for the year in which the benefit arises (12.8% for 2006/07), not the rate for the year in which the liability is paid.

What if a van is provided?

There is a scale charge of £500 (£350 if the van is over four years old at the end of the tax year) where a van, as defined, is provided for private use. From 6 April 2007, the scale charge will increase to £3,000 with no reduction for older vans. In addition, a fuel benefit of £500 will be introduced.

Currently, an employee can elect for an alternative charge at a daily rate of £5 if the private use is only for a few days. There are complex rules for shared vans where several employees have private use. However, there is some good news. From 6 April 2005, there is no charge for employees that have to take their van home overnight but who are not allowed any other private use.

What if employees use their own cars for business?

Employees using their own cars for business mileage can be paid a tax- and national insurance-free mileage allowance under the Approved Mileage Allowance Payments (AMAPs). There is no reporting requirement and employees may claim tax relief if the payments are only in respect of business mileage in the employees' own personal vehicle and the mileage paid does not exceed the statutory rates. The rates for 2006/07 are:

Therefore, assuming the mileage is reimbursed within the AMAPs, and there is no profit element, it is no longer necessary to include this in a dispensation.

Who should I contact?

If you would like advice on any of the points covered by this fact sheet please contact the person at Grant Thornton who normally advises you, or the local office shown below.

© Grant Thornton UK LLP 2006 All rights reserved. Factsheet 79 - April 2006