Expensive but still cost effective
In April 2018 the tax and NI charges for company cars crept up again. While the maximum charge didn’t increase, the CO2emissions bands moved so that the majority of company car drivers will pay more in 2018/19 and in 2017/18 for the same car. Despite this, financing a car through your company can be more cost effective than doing it personally. This is something to keep in mind if your spouse, son or daughter needs a new set of wheels.
Example. Peter is a director shareholder of Acom Ltd. He is a higher rate taxpayer. His daughter Katy needs a car and Peter agrees to fund the purchase. His budget is £13,000. To keep annual costs down Katy picks one with CO2 emissions of under 95g/km. Katy will pay the running costs, e.g. insurance, servicing, etc. How do personal and company ownership stack up against each other?
Katy as owner. The idea is for Katy to keep the car after four years and buy a replacement herself. At that time its expected value is £4,750. This means the net cost to him is £8,250 (£13,000 – £4,750). He takes extra dividends of £12,222 from Acom to cover this, which after tax at 32.5% leaves £8,250.
Acom as owner. The cost over the four years to Acom would also be £8,250, but it receives corporation tax (CT) relief at 19%, which makes the net cost to it £6,683. Peter must pay tax on the company car of £988 per year. He takes dividends each year of £1,464 to cover the tax bill. That’s £5,856 over four years. After 32.5% tax that’s £3,952. Acom has to pay Class 1A NI on the car benefit, which after CT relief is £1,104. The total cost to Acom for the car is £13,643 (£6,683 + £5,856 + £1,104). The calculations indicate that personal ownership by Katy is the cheaper option, but that’s not the full story.
If Acom (and not Katy) pays the running costs and Peter reimburses Acom, and Katy reimburses him, this reduces the tax and NI payable on the company car option. This can tip the balance in favour of Acom owning the car.
Tip. For the reimbursed expenses to reduce the tax and NI, Acom must make it a condition of it providing the car. This should be put in writing in case HMRC asks questions.
Less tax and NI. Assume the average annual cost of insurance, road tax, servicing etc. is £1,700. If Acom pays this and requires Peter to reimburse it, the corresponding amount on which he is taxed for the car is reduced by the same amount. Over the four years of ownership that’s a tax saving of £2,720. Therefore, Peter needs correspondingly fewer dividends from Acom to cover the cost. Acom also saves money. Katy’s financial position is neutral, it’s just that she reimburses Peter for the running costs instead of paying them direct.
Tax saving makes the difference. In our example, the tax savings achieved by simply changing how the running costs are managed is over £4,500 (see The next step ). This makes company ownership significantly the cheaper option.