Company cars - a tax-efficient option?

Despite substantial tax costs, the company car remains an important part of the remuneration package for many employees – and an essential business tool for many employers.

However, tax and national insurance costs could mean that your company car may not be the most tax-efficient option for either employer or employee. There is also a fuel benefit charge where fuel for private use is provided with the car. The car benefit and car fuel benefit, on which you pay income tax at up to 50% and your employer pays 13.8% Class 1A national insurance contributions (NICs), are calculated at up to 35% of the list price (no longer capped at £80,000) and a notional £18,800, respectively.

For some, an employer provided van may be a viable alternative to a company car: the tax charge is £1,200 plus up to £220 for fuel for those paying tax at 40% (earning approximately £42,500 to £150,000 in 2011/12).

The company car or van benefit is currently subject to a Class 1A national insurance charge of 13.8%, payable by the employer.

In previous years, these employment tax measures have in many cases increased the cost of providing cars to employees significantly. More recently, changes to the Captial Allowance regime means that the period of cover which the employer can obtain relief against profits for the purchase of cars has significantly increased, further increasing the effective tax cost of providing cars to employees. It may therefore be worth reviewing the company car policy completely, as it could prove more beneficial to pay employees for business mileage in their own vehicles, at the statutory mileage rates.

We can help you to determine whether the company car is still a tax-efficient option, whether a qualifying ‘van' might be an alternative, and ultimately help you decide on the best course of action for your business. For advice or further information please contact Ian Gadie on 020 7516 2256 or email igadie@littlejohnllp.com