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Kirk Rice Blog

Company Car Or Cash Alternative?Written on April 11, 2018 by Kirk Rice LLP

Company Car Or Cash Alternative?
Taxing Times Questions

The Question:

I am employed and I am due an annual salary review. My employer has offered me a fully paid for company car, or, a cash increase in my annual salary. I do not know which one to go for and so could you give me some pointers, particularly on the tax implications?

Kirk Rice LLP answers:

There are many reasons for the popularity of having a company car. These include status, convenience and the certainty of avoiding unexpected cash flow problems from large repairs, etc.

In the past, the tax regime favoured the company car against additional cash in hand; now, the issue is much more finely balanced. Certainly, the tax advantage of having a company car is far smaller than it was in the past.

As such, some employers now consider it appropriate to offer their employees a cash alternative to the company car. The decision is never an easy one and there are so many variables that there can be no one correct answer for all circumstances.

Factors to consider will include:

  • your cash flow;
  • the different National Insurance effects of salary or car;
  • the relative tax costs of company car or salary in lieu;

Additional salary

From a tax perspective, this is very straight forward and any additional salary will be subject to normal income tax and national insurance deductions. There are various online PAYE calculators which you can use to calculate how much additional after tax and NI income you will get.

Company Car

A company car tax charge arises when a car is made available to an individual by reason of his or her employment and where it is available for that person’s private use. The employee will be chargeable to income tax on the taxable benefit, known as the ‘cash equivalent’.

Where a car is made available to an employee then it is automatically deemed to be available for private use, unless there is a specific prohibition on such use and no such private use is made of the car during the tax year. Any use of a vehicle is a private use if it is ‘other than for the employee’s business travel’. Travel between home and the normal place of work counts as private use, even if the employee takes the car home only because he is on call, for reasons connected with the security of the vehicle, or because of inadequate parking facilities on the employer’s premises. It will only be in unique situations that a car will be considered not available for private use and therefore escape the tax charge.

The essence of calculating the taxable benefit of a company car is to apply a percentage (normally based on CO2 emissions) to the original list price of the car. Higher emissions, or a higher price, will lead to a higher tax charge. There are, however, all sorts of complications along the way, but in the simplest case the price of the car multiplied by the ‘appropriate percentage’ will give the cash equivalent of the car, i.e. the amount on which the employee will pay tax.

The original list price of the car is relatively easy to obtain, however, the ‘appropriate percentage’ is more difficult. The appropriate percentage depends on the CO2 emissions of the car, and, for 2018/19 tax year the percentage ranges from 13% for a car with emissions up to 50g/km to 37% for cars with emissions in excess of 179g/km. HMRC publishes a table of the emissions and corresponding percentages and that should be used to ascertain the correct percentage for your company car.

Example

Let’s say a company car is provided with an original list price of £32,000 and CO2 emissions of 117g/km. The appropriate percentage for 2018/19 will therefore be 24%.

The cash equivalent in this example will therefore be £32,000 x 24% = £7,680.

The employee will therefore pay tax on £7,680. For a basic rate tax payer (20%) that will be £1,536, and for a higher rate tax payer (40%) it would be £3,072. You would not pay national insurance for the benefit, but your employer would.

The government review the appropriate percentages and so the cash equivalent can change from year to year. In the above example, the government has already announced that the appropriate percentage will increase to 27% for 2019/20, thereby increasing the tax charge on the employee.

Making a Decision

Once you have crunched the numbers, you will want to consider whether the after tax additional salary is sufficient to buy your own car and cover the running costs, or, whether the tax you will pay on having a company car is less than suffering the depreciation and running costs of buying your own car.

Private Fuel

The above describes the tax position on the provision of a company car only. If your employer also pays for all fuel, including fuel for private use, then there is a further fuel charge. The fuel charge is calculated by applying the ‘appropriate percentage’ to a fixed figure which for 2018/19 is £23,400. Using the above example, if private fuel were provided for this car, then the fuel charge would be £23,400 x 24% = £5,616. The employee will therefore pay tax on £5,616. For a basic rate tax payer (20%) that will be £1,123, and for a higher rate tax payer (40%) it would be £2,246. You would not pay national insurance for the benefit, but your employer would.

You would need to assess how much private fuel you would use in a tax year to see whether it is worth having this benefit. If your estimated private fuel outgoings are less than £1,123 per annum for a basic rate tax payer or £2,246 per annum for a higher rate tax payer then it would not be worth having this benefit.

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Any reader interested in discussing company car implications can call Graham Jennings on 01344 875 000 in our Ascot office or Hadley Baldock on 0208 789 8588 in our Putney office or email info@kirkrice.co.uk.

If you would like to receive Kirk Rice’s Taxing Times Questions regularly by email, simply email info@kirkrice.co.uk stating Taxing Times Questions in the subject heading and we will add you to our distribution list.

Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made. Please note this information is correct on the date published and details may have changed since.

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