CARS - 17.05.2024

Reduce company car tax with capital contribution

Company cars

As you would expect, generally the more expensive your company car is and the higher its CO₂ emissions, the greater the tax bill is for you and the NI bill is for your company. One way in which both tax and NI can be reduced is via a contribution to the car purchase. What’s more, the higher the tax and NI, the greater the savings. The following examples show the comparative tax and NI bills with and without a capital contribution.

Tip. The maximum contribution that affects the tax and NI payable on a company car is £5,000. Any amount above this has no effect.

Example - no contribution. Ali, a higher rate taxpayer, is one of the owner managers of Acom Ltd. For the whole of 2024/25 Acom provides him with a car which had a new list price of £40,000 and CO₂ emissions of 145g/km. The taxable car benefit is 34% of the list price, i.e. £13,600. For 2024/25 Ali’s tax on the car is £5,440 (£13,600 x 40%) and Acom’s Class 1A NI bill is £1,876 (£13,600 x 13.8%).

Capital contribution

If Ali contributes the maximum tax-efficient amount of £5,000 to the cost of the car, the list price is treated as reduced by that amount.

Example - with contribution. Ali’s contribution reduces the tax and NI for 2024/25 by £680 (£5,000 x 34% x 40%) and £234 (£5,000 x 34% x 13.8%) respectively. Therefore, assuming Ali keeps the same company car for three years, the tax and NI saving derived from the £5,000 contribution will be £2,040 and £702.

Tip. If Ali is not able to come up with the cash to make the £5,000 contribution, Acom can lend it to him interest free. As long as Ali’s total borrowing from Acom never exceeds £10,000 in any tax year the money lent by Acom doesn’t count as a taxable benefit in kind.

Note. Acom incurs a temporary tax charge equal to 33.75% of the £5,000 loan. This is refunded for the accounting period in which the car is sold and the balance of the loan is written off.

Company car loan

Assuming after three years Acom sells the car for 40% of what it paid for it and keeps all the proceeds, Ali would be entitled to a proportionate credit of £2,000 (£5,000 x 40%) against the £5,000 he borrowed. This leaves Ali owing £3,000 which Acom can write off.

Example - contribution plus loan. Over the three years of ownership the £5,000 contribution has saved tax and NI of £2,742 (£2,040 + £702). Against this, tax and NI are payable on the £3,000 loan written off. As the write off must be treated as earnings, Ali’s tax is £1,200 (£3,000 x 40%), plus £60 NI (£3,000 x 2%). Acom’s NI is £414 (£3,000 x 13.8%). The tax and NI bill for the loan is £1,674. Taking account of the tax and NI savings from the £5,000 contribution this still leaves an overall tax and NI saving of £1,068 (2,741 - £1,068) at zero cost to Ali.

Tip. Use our calculator to help work out the tax savings you could make with a contribution (see The next step ).

For our car contribution calculator, visit https://www.tips-and-advice.co.uk , Download Zone, year 24 issue 16.