Sarah Laing warns of potential tax increases for employees with company cars available for business and private use.
The financial benefits of driving a company car have continued to erode over recent years, but this benefit remains one of the most popular and potent perks of a job. This article looks at some of the changes taking effect in April 2016 and beyond, and considers some of the basic tax costs relating to company cars.
Taxable benefit
The taxable benefit arising on a car is, broadly, calculated using the car’s full manufacturer’s published UK list price, including the full value of any accessories. This figure is multiplied by the ‘appropriate percentage’, which can be found by reference to the car’s CO2 emissions level using HMRC’s ready reckoner at https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/356654/TC2b.pdf.
This will give the taxable value of the car benefit. The value can be pro-rated where the car is only available to the employee for part of the year. The employee pays income tax on the final figure at his appropriate tax rate (e.g. 20% for basic rate taxpayers; 40% for higher rate taxpayers). In general terms, less tax will be payable on ‘greener’ cars.
Recent changes
Two new appropriate percentage bands apply from 2015/16 for cars emitting between zero and 50gkm CO2, and between 51 and 75gkm CO2, with the appropriate percentages set at 5% and 9% respectively. For cars emitting 76–94gkm CO2, the appropriate percentage band increased to 13% from 6 April 2015. Finance Act 2014 made further changes to increase these ‘lower emissions’ bands to 7% and 11% respectively from 2016/17. The appropriate percentage for cars with emissions of between 76–94gkm CO2 will rise to 15% from 6 April 2016.
It was announced at Budget 2014 that in 2017/18, the appropriate percentage for the 0-50gkm CO2 band will be 9% and 13% for the 51–75gkm CO2 band. Finance Act 2015 enacted these figures, together with the figure of 17% for the 76–94gkm CO2. Budget 2014 also announced that in 2018/19 and future years, the appropriate percentage for the 0-50gkm CO2 band will be 13% and 16% for the 51–75gkm CO2 band. Again, Finance Act 2015 enacted these figures, together with the figure of 19% for the 76–94gkm CO2.
If the emissions figure is equal to the relevant threshold’ (which is 95g/km for 2015/16), the appropriate percentage is 14% for 2015/16, rising to 16% in 2016/17. If the emissions figure exceeds the relevant threshold, the threshold percentage is increased by one percentage point for every 5gkm CO2 in excess of the relevant threshold up to a maximum of 37% for 2015/16 and subsequent years.
Example: Comparing cars
Sam, a higher rate taxpayer, has a company car with a list price of £18,000 and CO2 emissions of 50gkm, giving an appropriate percentage of 5% for 2015/16. The taxable benefit will be £900 (£18,000 x 5%) and the tax payable will be £360 (£900 x 40%). In 2016/17, the tax payable by him will increase to £504 ((£18,000 x 7%) x 40%), representing a 28% increase.
Ted, also a higher rate taxpayer, has a company car with a list price of £18,000, but CO2 emissions of 160g/km, giving an appropriate percentage of 27% for 2015/16. His taxable benefit will be £4,860 (£18,000 x 27%) and the tax payable will be £1,944 (£4,860 x 40%). In 2016/17, the tax payable by him will increase to £2,088 ((£18,000 x 29%) x 40%), representing a 7% increase.
Although the tax payable on cars with lower emissions is still considerably lower than those with higher outputs, the increases set to take effect over the next few years will mean ‘greener’ company car drivers will experience steeper increases in the resulting tax payable.
Practical Tip:
Up to £5,000 may be deducted from the list price calculation for any capital contribution made by the employee, which could be provided in the form of an interest-free or low interest loan from the employer, and will serve to reduce the tax payable on the provision of a company car.
