We recently spoke to Duncan Mitchell of CED Accountancy Services about employer provided cars. The tax and national insurance effects impact the employer as well as an employee or director who has an employer provided car.
Duncan explained “An employer provided car results in a benefit to an employee or director upon which income tax is payable. The employer will suffer a Class 1A National Insurance Contribution (NIC) charge at 13.8% of the amount which is assessed as a benefit on the employee.
The amount of the benefit rises each year and the increases should be considered before a car is purchased by the employer. For most cars, we have got used to the amounts increasing by 1% each year but, from 6 April 2015, the amounts will increase by 2% each year.
Also the current cap on the percentage charge, currently 35%, will increase to 37% in 2015”
We reproduce a table that Duncan gave me illustrating his point:
A car was purchased for use by a director on 6 April 2013. A car is normally kept for four years before it is replaced. The CO2 emissions are 130 gm/km and the list price is £30,000. If the car is a petrol car, the benefit on the director (and the income tax cost) and the NIC cost on the company are:
Tax year Benefit Tax Employer
% £ (at 40%) NIC
2013/14 18 5,400 2,160 745
2014/15 19 5,700 2,280 787
2015/16 21 6,300 2,520 869
2016/17 23 6,900 2,760 952
Duncan explained that “The future increases may affect a decision as to when to replace a car. One of the reasons for the annual increase in the percentages is the work undertaken by car manufacturers to lower the polluting effects of a car which means lower carbon dioxide emissions. So, an equivalent new car purchased after April 2015 may have a lower tax cost if the CO2 emissions for that type of car have fallen significantly. Or you may decide that private ownership by an employee of a car would be a better option. Some research on the different types of car may well be worthwhile, Hybrid and electric cars tend to be tax efficient, and even high end marques such as Porsche and BMW have cars which demonstrate attractive tax efficiencies”
Duncan then spoke about the car fuel benefit
“For most businesses and employees it is not beneficial to have private fuel paid for by the employer. The CO2 emission percentage is applied to a set figure. The figure for 2014/15 is £21,700.
It is therefore, in many cases, better for the employer to pay only for the business mileage.
There are two ways to achieve this. The employee can claim a mileage allowance from their employer for business travel or the business pays for all the fuel with the employee subsequently making good the whole of the cost of the private fuel provided. Both methods are based on HMRC issued rates although they are different rates and often confused.
The requirement to reimburse in full for private fuel has caught many employers out when HMRC have conducted an Employer Compliance visit”
Duncan Mitchell is a director at CEDAS (www.cedas.co.uk) . You can call him on 01327 358866.