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Are company cars for contractors a viable option?

Published on Friday, March 24, 2017 in category:


Because of the changes to legislation regarding taxation of dividends, contractors are more and more looking at alternative drawing and remuneration strategies. There has been a noticeable uptick in client enquiries about company cars, so we thought we’d share ur knowledge on this hot topic.

 

When establishing whether it is tax efficient to have a company car, we need to consider three things:

 

  • The cost in tax and NIC to the director and the company;
  • The tax relief available to the company; and
  • The tax saved by the contractor due to dividend sacrifice.

 

Its worth looking at these in turn and then bringing them all together later.

 

Tax and NIC costs

As a company director (or employee), you’ll pay tax on the provision of a company car based on two parameters: the car’s list price and it’s CO2 emissions. Simply, the more expensive the car and the higher the emissions, the more tax and NICs will be payable.

 

To calculate the benefit-in-kind figure you must multiply the list price of the car by a percentage based on it’s CO2 emissions. The percentage is on a sliding scale, from 9% for zero emissions, all the way up to 37% for car with emissions above 200g/Km. The percentages are changing annually so it’s definitely worth tracking these as the changes can make a huge difference to the tax cost as a whole.

 

For example, an Audi A4 Avant Diesel has a list price of £32,495 and has emissions of 104g/Km. By referring to the scale table, we can establish that the percentage we need to apply is 22%. The benefit-in-kind is therefore £32,495 x 22% = £7,149.

 

Once you have established the benefit-in-kind chargeable, we can then calculate the tax and NIC payable. To do this, you simply multiply the BIK figure by your marginal tax rate – 20% or 40% to arrive at the tax payable figure. The company also needs to pay 13.8% Class 1a NICs on the benefit figure.

 

Therefore, the tax costs on the Audi above would be as follows:

 

                                                                                                            Basic rate                Higher rate

                                                                                                            taxpayer taxpayer

 

Income tax, either:                                                                 £1,430                    £2,859

Class 1a NICs:                                                                            £    986                    £    987

 

Total tax cost                                                                           £2,416                                    £3,846

 

The maximum tax cost for the car is therefore £3,846.16, and against this we must weigh the tax relief the company will get against the cost of buying and running the car.

 

Tax Relief for Company

The company will be providing the car to the director as part of the hypothetical “service contract” in place between the company and the director and therefore will receive tax relief without any private use adjustment. Once again, the tax relief that is available will depend upon two variables: the carbon emissions, again, and how the car is financed:

 

If the car is financed via a lease or contract hire, then monthly premiums are fully allowable as a company expense, reducing the taxable profit accordingly.

 

If the car is bought outright, or is financed via Hire Purchase or another similar scheme, then the company will get Capital Allowances on the costs. Again, this depends on the CO2 emissions: Cars with 75g/Km or less will be able to claim a full 100% allowance on the cost of the cost of the car in the year of purchase. If the car’s emissions are between 76 and 130g/Km, the allowance drops down to 18% and above 130g/Km, it’s 8%.

 

A bit about Capital Allowances:

To the non-accountant Capital Allowances can seem a bit confusing: if a vehicle does not qualify for then 100% first year allowance, then you need to apply what is known as Writing Down Allowance (WDA) at either 18% or 8% depending on the emissions. You still get tax relief but it’s apportioned over a number of years rather than given as one upfront thump. For example: A car costing £30,000 qualifying for 18% WDAs will receive capital allowances of £5,400 in year one (£30,000 X 18%) then £4,428 in year two (£30,000 - £5,400 = £24,600 X 18%), then £3,630 in year three (£24,600 - £4,428 = £20,172 X 18%) and so on and so forth. You can see that the allowances are reduced (written down) each year, hence the name.

 

The examples at the end of this article shows how this tax relief is applied.

 

Personal tax saved due to dividend sacrifice

If you do reduce your dividend payment and instead pay for the finance costs and running costs of the car, then your personal tax liability will be reduce due to this reduction in dividend.

 

The tax you save will depend on (a) the costs incurred and (b) your marginal rate of tax.

 

If you’re  basic rate taxpayer, the dividend rate is 7.5%, and if you’re a higher rate taxpayer, it’s 32.5%. So, if the dividend sacrificed is £1,000 per month, then the dividend tax saved will be either £75 or £325, depending on your prevailing tax rate.

 

But remember, because the costs are all being borne by the company, you will not be in a position to claim back your mileage from the company. This could make a big difference in the decision making process.

 

Pulling this all together

Perhaps the easiest way to crystalise this information is to provide examples. Remember that there are different reliefs available depending on how you finance the car so in order to give a meaningful comparison, we’ve based each calculation on a three year cycle. For simplicity, we’ve also assumed that the contractor is a higher rate taxpayer throughout.

 

Example 1: Audi A4 Avant 2.0 TDI

 

List price              £32,495

Emissions            104g.km

Finance                  £4800 per year

Running costs   £5,000 per year

 

Tax Costs

Total tax cost over three years                   £8,580

Total NIC cost over three years                  £2,961

                                                                                          £11,541

 

Tax Savings

Tax relief on running costs                             £2,850

Tax relief on Capital allowances                  £2,770

Tax saved on dividend sacrifice                  £8,775

                                                                                          £14,395

 

Therefore, assuming costs are consistent if the car or privately or commercially owned, you would save £2,854 over three years having a company car

 

 

 

Example 2: Tesla Model S

 

List price              £73,326

Emissions            0g.km

Finance                  £12,000 per year

Running costs   £5,000 per year

 

Tax Costs

Total tax cost over three years                   £7,920

Total NIC cost over three years                  £2,733

                                                                                          £10,653

 

Tax Savings

Tax relief on running costs                             £2,850

Tax relief on Capital allowances                  £6,600

Tax saved on dividend sacrifice                  £16,575

                                                                                          £26,025

 

Therefore, assuming costs are consistent if the car or privately or commercially owned, you would save £15,372 over three years having a company car

 

 

Example 3: BMW M3 Saloon

 

List price              £58,545

Emissions            180g.km

Finance                  £12,000 per year

Running costs   £9,000 per year

 

Tax Costs

Total tax cost over three years                   £24,588

Total NIC cost over three years                  £8,484

                                                                                          £33,072

 

Tax Savings

Tax relief on running costs                             £2,850

Tax relief on Capital allowances                  £2,461

Tax saved on dividend sacrifice                  £20,475

                                                                                          £25,786

 

Therefore, assuming costs are consistent if the car or privately or commercially owned, you would pay £7,286 over three years having a company car

 

Note the fairly obvious correlation between tax relief and environmentally-friendly cars.

 

Remember though that you shouldn't let the tax relief tail wag the true cost dog. While it might be tax efficient to buy zero- or low-carbon cars, remember that they may be more expensive to buy, or have poor residuals which could knock out any tax advantages.

 

We’re putting together an excel calculator that will do the calculations for you so do let us know if you’d like this sent to you. In the meantime, please contact us for more information.