Whether you are an employer providing a car or an employee accepting one, understanding how this affects your personal taxation is important. It’s an area that has become a little more complicated in recent years because the government is trying to encourage lower emission vehicles on the road.
In the more distant past, a company car was seen as a perk of the job. It’s now considered a ‘benefit in kind’ and is subject to tax. That means you can find your overall income being affected.
Here we take a closer look at company car taxes and what they mean for small businesses in particular.
Calculating the BiK Cash Value
Benefits in kind are any products or services that are provided in lieu of payment of wages. The most common are things like healthcare, loans to pay for season tickets for travel and, of course, the company car.
The first factor that is used to determine the tax on any company car is the value of the vehicle itself. A brand new BMW is going to incur a higher tax cost, for example, than an electric Nissan Leaf. In recent years, factors such as fuel type and economy as well as CO2 emissions have been introduced in setting rates.
The government is looking to encourage businesses to move towards lower emissions and there are benefits in choosing an electric vehicle, for example, over a diesel one.
What’s Included in the Manufacturer’s List Price
The first thing you need to consider when deciding what car to choose for your company is the list price. This not only includes the standard cost of the car but any accessories that you might want to include. If modifications are to be made to the vehicle, then these also have to be included. It doesn’t matter what part of the tax year the vehicle was purchased.
Calculating the BiK
This will depend on a number of factors:
- A petrol engine car costing £24,000 and with CO2 emissions of about 112 g/km will incur a BiK of 26%. That means you will be paying tax on £6,240 (£861 NI and £1248 tax).
- A diesel car costing the same amount and having similar CO2 emissions will have 4% added onto the BiK so it will be 30% and the NI and tax greater.
- If you opt for an electric car at the same price, the BiK drops dramatically to 16%. That means you’ll have a BiK value of £3,840 on which you’ll pay tax (£529 NI and £758 tax).
The more emissions that you create then the higher your BiK rate will. For example, if you have emissions of between zero and 50 g/km, the rate is 16%. 51 to 75 g/km and it rises to 19%. Above 100 and it’s 24%. The highest BiK rate you can be charged is 37%.
The point here is that the more economic and green your car is, the lower BiK rate you are going to have. HM Customs provide a useful Company Car and Car Fuel Benefit Calculator that you can access for free if you are trying to decide between makes and models.
Changes for 2020
The good news is that these rates are set to change dramatically in 2020 for eco-friendly cars. Fully electric company cars that have zero emissions will have no BiK tax whatsoever associated with them. Cars with low emissions will also benefit from lower BiK rates.
It’s important for small businesses, in particular, to work with their accountancy services to determine whether it’s beneficial to offer a company car or whether it’s better to, for example, offer mileage claims for business-related travel. If it is the right way to go, choosing a fully electric vehicle that has 0 emissions is the most efficient way to reduce tax liability.
If you need help with your small business accounting, from yearly tax returns to expert business and finance advice, including company cars, get in touch with Neil Smith Accountancy. Our professionals are on hand to help small businesses based in Essex, London and the surrounding areas.