Tax benefits and leasing / contract hire disallowances
It is very important that careful consideration is made prior to taking on a company vehicle as there could be large tax implications of company cars for both the employee and employer.
A vehicle’s C02 emission levels and P11d value, as displayed on the Lease Profiles site have a direct impact on the tax you will pay.
Employee Company Car Tax
Company cars are considered a benefit and therefore are taxed as a benefit in kind (BIK) for most employees and therefore income tax is payable in most cases.
Exemptions include pool cars which must be kept at the business and not used for any personal journeys.
Employees pay tax based on an assumed benefit calculated as a percentage of the car's list price. The percentage paid depends on the car's C02 emissions, the higher the C02 emissions, the higher the benefit is and more tax the driver will pay.
For 2020/21, the rates range from 0% (for cars with zero emissions such as all pure electric vehicles) up to 37%, with most polluting large diesel vehicles paying an extra 2%. Rates differ depending on whether the car was registered before or after 6 April 2020 (when the latest emissions testing rules changed).
There are substantial advantages and cost savings for zero emission electric cars. Falling from 16% for 2019/20 to 0% for 2020/21 before slowly rising in future years.
Low C02 emitting hybrid cars, below 50gm/km C02, the rate will depend on the electric range available. 2020/21 rates range from 0% (for an electric range over 130 miles) to 12% (range below 30 miles).
The tax cost to the employee depends on the tax rate they pay. For example, for a car with a list price of £20,000 and a rate of 30% (based on emissions), the benefit in kind would be £6,000 (£20,000 @ 30%). The income tax charge would be £1,200 for a basic rate taxpayer (£6,000 @ 20%) or £2,400 for a higher rate taxpayer (£6,000 @ 40%).
The rates applied to the C02 bands have continued to increase every tax year with the government’s intention to continue that trend to persuade drivers’ into more fuel-efficient cars.
Business miles has no effect on the tax paid, nor has the age of the car, except that a special scale charge applies to cars registered before 1998.
The list price is based on the price published by the manufacturer, importer or distributor and includes delivery charges, options, accessories and VAT but excludes vehicle road tax.
Commercial vehicle drivers will pay tax if there is any significant private use. Employees are taxed on a benefit of £3,490 for 2020/21 (£3,430 for 2019/20) for all levels of non-zero C02 emissions.
For vans with zero C02 emissions the charge is reduced to £2,744 for 2020/21 (£2,058 for 2019/20).
For private use travelling to and from home and work the employee will pay nothing.
Tax on fuel
If any free or subsidised fuel is provided by the employer for private use in a company vehicle (car or van), the employee pays income tax on this benefit. The value of this benefit depends on the fuel efficiency of the engine, not on how much fuel is provided.
The percentage charge for each car is normally the same as that car's charge for car benefit Therefore cars with higher C02 emissions have a higher percentage charge with discounts and exemptions applying for electric vehicles.
The percentage charged is applied to an annual figure to calculate the taxable benefit. This is a fixed figure called the ‘fuel charge multiplier’ and is the same for all cars.
The benefit charge multiplier is £24,500 in 2020/21 (£24,100 in 2019/20). Therefore for a vehicle with a percentage charge of 30%, the taxable benefit would be £7,350 for 2020/21.
The income tax payable for a basic rate tax payer @ 20% on £7,350 would be £1,470.
For a higher rate tax payer the tax charge @ 40% on £7,350 would be £2,940.
Drivers of commercial vehicles are exempted from the fuel benefit charge if the van is used solely for business purposes.
For any significant private use of commercial vehicles the driver is taxed on a benefit of £666 in 2020/21 (£655 in 2019/20).
Tax-free benefits of Contract Hire
Although the use of a company car and fuel (if provided) are taxed, company car drivers’ do not pay tax on other benefits provided within the contracts.
Peace of mind is provided with no surprises with unexpected repair bills. The benefits of a fully maintained contract hire agreement include, maintenance and servicing, road tax and roadside assistance. All costs that would be borne by the driver if they were without a company vehicle to use.
Contract Hire and Leasing Taxable Benefits
The levels of corporation tax paid is a very important part of any Limited companies financial planning. The question of whether car lease rentals being tax-deductible is important. For most types of contract hire and leasing agreements the monthly rentals are tax-deductible for corporation tax purposes with the following criteria applied.
Contract Hire / Leasing rentals are not fully tax-deductible if the car has C02 emissions over 50g/km, the rentals aren’t evenly spread over the life of the lease, or the lease has clauses that may allow the company to eventually own the car.
For cars emitting 51 g/km or more of C02 are subject to a 15% tax disallowance on the amount of the rental that can be claimed against the business’ profits. Only 85% of the value of the car leasing costs qualify for tax relief.
Cars on contract hire or leased by companies that have a C02 of less than 51g/km there is no disallowance and therefore tax relief is fully available against the profits of the business – making business contract hire highly tax efficient.
VAT and Contract Hire
Companies using cars funded on contract hire wholly for business use may recover all the VAT paid on the monthly rentals. If there is ANY private use 50% of the VAT on the finance element can be reclaimed (excluding any maintenance). Monthly contract hire rentals are generally broken into two elements, finance and maintenance rentals. If maintenance is included with the contract, the company can claim 100% of the VAT back on the maintenance element of the monthly rental.