COMPANY CARS - 05.04.2012

Are company cars still worth it?

Budget changes

It was no great surprise when Mr Osborne said in his Budget speech that he was going to continue the previous government’s programme of increased taxation of company cars, but he’s gone further. The changes coming into force this April were already known, but the Chancellor announced a swingeing rise in future years, subject to one or two exceptions. But it’s not just the drivers that will be hit, employers might also lose out on tax relief.

Company car drivers - new rates

The company car tax CO₂ rates up to April 2016 are now known. But it’s not easy to follow what’s changed because some limits disappear while others are introduced, and all the while there’s a general trend that the tax charge for each CO₂ band will rise by 1% for each year. We’ve collated the tables for the next four years which should make identifying the tax cost of your company car easier (see The next step).

Company car drivers - losers

An odd thing about the rates from April 6 is that drivers of low CO₂ cars who qualified for a 10%-of- list-price benefit-in-kind charge up to April 5 will see a 40% hike in their car tax bill thereafter. Having enticed people into going for low CO₂ cars, the government has moved the goalposts.

Example. Reg’s company car was purchased by his employer in 2011 for £16,000. The car was chosen because it produces CO₂ emissions below 120g/km meaning the BiK would be 10% of the original list price, i.e. £1,600. From April 2012 the BiK will be 14% and from April 2014, 15%. As a 40% taxpayer Reg will see his company car tax bill rise from £640 for 2011/12 to £896 for the current year, and to £960 the next.

Company car providers - buyers

Businesses which provide cars to directors and employees will see the rate at which they can claim tax deductions on the cost of cars reduced, but the good news is this won’t happen until April 2013. Until then companies can claim 18% per annum capital allowances (CAs) for cars with CO₂ emissions of less than 160g/km, but only 10% for cars emitting more. After that date the tipping point for CAs will be 130g/km for existing and new cars.

Company car providers - renters/leasers

For businesses which rent or lease their company cars, there’s a similar change to that for the buyers. Until April 2013 a full tax deduction is allowed for the cost of renting/leasing charges for cars with CO₂ emissions up to 160 g/km, but those with higher emissions can only claim 85% of the cost. From April 2013 this cut-off point for the restriction will be 130g/km.

Conclusion. Company cars will still be a tax-efficient alternative to salary for employees. But director/shareholders who drive company cars must take account of the tax and NI increases for both their business and themselves.

Tip. Use the CO₂ tables to do the number crunching for the next four years. This way you’ll be able to set a tax-efficient company car policy or switch to an employee car subsidy scheme.

For the CO₂ tax table, visit http://tax.indicator.co.uk (TX 12.13.02).