Should You Have a Company Car?
When making financial decisions it is important to look at the full picture – to look at all your resources and objectives in total. Looking at parts of your financial life in isolation can lead to solutions being missed and worse outcomes being experienced. This is doubly true for business owners, whose resources have an added dimension.
An area where we see this ‘silo thinking’ frequently is company cars.
Many business owners like company cars because the company pays the bill - it doesn’t come out of their personal account and they can think “it’s not my money”. This can also be used to justify spending more, because they’re not paying.
Well, not directly at least. In reality, the company pays a big lease (or depreciation) and they incur a large tax charge. It usually ends up costing them far more than if they bought/leased the car personally and paid themselves bonus/dividends to cover it.
[and even more than if they bought a car a couple of years old and kept it]
Company Car Tax
If a company provides a car for an employee’s personal use, a proportion of its new list price is treated as a benefit-in-kind (P11D value) earned by the employee. The proportion is based on the CO2 emissions of the car.
There are various rules governing partial/restricted use and employee contributions amongst other things.
The rules have gradually changed to incentivise low & zero emission vehicles and discourage higher polluting vehicles, such as SUVs and higher-powered cars. Big changes came in for 2020/21, with drastically lower rates on zero emission cars – down temporarily to a 0% rate for fully electric vehicles.
Business Owner Scenario
A business owner who is a higher rate taxpayer, leases a £50,000 company car in the top 37% BIK rate (1) either for £500 p.m. ex-VAT through the business or £600 p.m. inc.-VAT personally.
The 37% band results in a P11D value of £18,500 (i.e. 37% of £50,000). This means the owner is treated as if they’d earned £18,500 for income tax and employer National Insurance Contributions (NICs) purposes.
Option 1.) Company Car / Business Lease
Company:
Pays £6,000 (ex-VAT) car lease plus £2,553 of employer NICs (13.8% of £18,500) on the P11D benefit. Total cost to company: £8,553 p.a.
Personal:
Income Tax of £7,400 p.a. (40% of £18,500) - more than the lease itself!
Option 2.) Bonus & Personal Lease
What if the company spent the same amount paying a bonus (better still when using dividends), and the owner personally leased the car?
Company:
Pays a £7,516 bonus, which incurs £1,037 of employer NICs, giving the same £8,553 p.a. cost to the company.
Personal:
The £7,516 bonus is subject to income tax of £3,006 (40%) and employee NICs of £150 (2%), leaving a net bonus of £4,359 p.a.
The personal lease costs the business owner £7,200 p.a. (inc. VAT). After receipt of the £4,359 net bonus, the reduction in net/disposable income is £2,841 p.a.
This is a massive £4,559 better than the tax cost of the company car (£7,400 - £2,841).
Therefore, the business owner taking out that £500 p.m. company car lease has managed to leave themselves £380 p.m. NET worse off, compared to leasing the same car personally.
Lower Emission Vehicles
The new rules mean for an SME business owner, it is only really worth using a company car if you are going to purchase/lease a low emission car, particularly a plug-in-hybrid or fully electric vehicle.
With traditional petrol and diesel powered vehicles, even more modestly priced ones with lower emissions, do not make sense as company cars.
If in the previous scenario we assume a £30k car with a lower 30% BIK rate (2) with a £300 p.m. ex-VAT business lease/£360 p.m. inc-VAT personal lease, the company car option is still expensive.
The cost to the company in this case will be £4,842 p.a. for the lease (£3,600) and employer NICs (£1,242). The company car will cost the business owner £3,600 in tax (£9,000 P11D cost at 40% tax).
The bonus/personal lease option costs the business owner £1,852 in disposable income; a £2,468 net bonus, minus £4,320 cost of the personal lease - a sizeable £1,748 less than company car tax bill. This represents a saving of £146 p.m. net income by not taking out the £300 p.m. company car lease.
If that same car was a fully electric vehicle however, there would be no personal income tax in 2020/21 and just £150 next tax year and £300 in 2022/23! There are also separate rules for commercial vehicles e.g. vans and some pick-up trucks.
Conclusions
Business owners need to consider their finances as a whole. Their business should not be viewed as an entirely separate asset – it’s a big part of their financial lives. Silo thinking can lead to unsuitable courses of action being taken and large amounts of money being wasted.
For a business owner, proper financial planning needs to incorporate their business. The use of its profits and reserves should be viewed through the perspective of how best to achieve the owner’s personal life objectives. Only by considering the full picture can the best solutions be put in place.
All tax rates and allowances refer to 2020/21 tax year. We have assumed the business is VAT registered and can reclaim the VAT. The changes in personal tax are based on the owner being a higher rate tax payer and taking salary/bonus only for simplicity – the savings are even greater where dividends are used.
(1) Emissions >170g/km or >150g/km for non-RDE2 diesels
(2) Emissions 135-139g/km or 115-119g/km for non-RDE2 diesels
Emission rates refer to cars registered after 6th April 2020 – the figures differ for cars registered before this point (although the general premise remains the same).
Disclaimer:
The above is provided for general information only. No action should be taken without seeking advice for your specific circumstances. Collingbourne Wealth Management does not provide tax advice. All information is based on our understanding of current tax rules as at the time of writing, which is subject to change.
Image Source: Unsplash
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