The tax legislation lays out a specific method for how you calculate the taxable benefit in kind for a car provided by your employer. And whether you are buying a car on PCP or car leasing, you need to consider the same things.
This blog was written by Ben Powell ACA CTA of award-winning chartered accountancy firm, Ballards LLP. A qualified chartered accountant and chartered tax adviser, Ben is a double prize winner for his professional studies with the Institute of Chartered Accountants in England & Wales.
The car benefit is applicable to all scenarios where company cars are provided to employees. In this instance, the list price of the car is multiplied by a percentage based on the emissions to give a benefit in kind figure which is added to the employees’ taxable income.
It is important to note that the list price is the ‘as new’ price of the car and does not change with age, so the car benefit will not get cheaper as a car gets older. The list price also includes the cost of additional accessories such as alloy wheels, metallic paint, and climate control.
Relevant emissions percentages can be found at the HMRC website.
For example, if a employee had a Ford Focus 1.0 Petrol EcoBoost with emissions of 105g/km in 2018/19 and a list price of £22,815, the taxable benefit would be 22% of £22,815, so the employee would be taxed as if they had earned an additional £5,019 in 2018/19. As a basic rate tax payer this would cost the employee £1,003.80 per year, or for a higher rate tax payer this would cost £2,007.60.
At the other end of the scale, a Buggatti Chrion with emissions of 516 g/km and a list price of £2,500,000 would give a taxable figure of £925,000, and a likely tax charge in excess of £370k.
Diesel cars have 4 percentage points (3% to 5 April 2018) automatically added to the benefit in kind percentage compared to a petrol cars, so diesel cars are generally more unaffordable as company cars due to government’s policy to remove diesel cars. Diesel cars which meet the ‘Real Driving Emissions 2’ (RDE2) standard are not subject to this 4% charge, but currently there are no cars on the market that meet these criteria.
The general rule of thumb is that low emission, low list price cars are the most tax efficient.
Where a company car is provided and the above benefit is charged, the employer can pay for all costs of the car such as insurance, repairs and maintenance, road fund license, and business mileage/fuel. However, where fuel is paid for by the employer for private mileage, an extra benefit in kind is charged known as the Fuel Benefit.
The employer can pay for business mileage and charge an employee private mileage in various ways. For example, the employer could pay for all fuel but then charge the employee private mileage based on a mileage log or the employee could pay for all fuel and then be reimbursed for business mileage by the employer.
In these instances, only the car benefit is applicable and the fuel benefit is not charged.
However, if the employee has a company credit card or fuel card to fill up the car with fuel and does not somehow repay the private element, then the fuel benefit will be charged in addition to the car benefit.
It is also important to note that commuting to a regular place of work is classed as private travel and not business mileage, and hence the fuel benefit will be charged where fuel is provided for commuting.
The fuel benefit is calculated by multiplying the same percentage derived from the emissions figure for the car benefit above against a fixed figure which is not dependant on the company car itself. This figure for 2018/19 is £23,400.
Going back to our examples above, the Ford Focus will have a fuel benefit of £23,400 at 22%, so £5,148, costing a basic rate tax payer £1,029.60. The Buggatti Chiron will have a fuel benefit of £23,400 at 37%, so £8,658. Note that list price is not a factor here.
The general rule of thumb with the fuel benefit is that low emission cars are the most tax efficient, and the fuel benefit is only sensible if the car is being used for very high levels of private mileage and commuting.