How to reduce company car tax

November 6, 2017|In KRW Tax Tips|By Keith Witchell

Company car tax is based on the car’s list price when new, and its Co2 emissions, and with annual increases, the tax/NIC on a company car benefit can soon mount up.

So, is there anything that can be done to reduce the tax charge?

For Directors, we usually advise running the car personally and reclaiming mileage as a more tax efficient solution for all but the lowest Co2 emitting cars.

However, for employees (or Directors who still choose to run a company car) there is something that can be done to reduce the tax/NIC that applies.

As mentioned above, the company car benefit in kind is calculated by applying a Co2 emissions based percentage to the car’s list price when new. But the list price can be reduced where the employee makes a capital contribution towards the cost of buying the car. The maximum capital contribution that can be taken into account is £5,000, but for a car with a list price of, say, £25,000 this still has the effect of reducing the taxable benefit (and therefore the tax/NIC charges) by 20%.

So, I hear you ask, why would your employee want to contribute £5,000 towards the cost of the car? The simple answer is they wouldn’t! But, as it is possible to make interest-free loans to an employee of up to £10,000 without creating a beneficial loan benefit in kind, you can lend them the £5,000 tax-free, which they in turn contribute back to the company towards the car.

What’s the downside? Technically, their contribution means that they will ‘own’ part of the car (eg. 20% in the above example of a car costing £25,000). When the car is sold they would be due the same percentage of the sale proceeds but, due to depreciation, this will leave them with a loan balance owing to the company (eg. if the car is sold for £15,000 after 3 years, they will be due £3,000, leaving £2,000 of the original £5,000 loan outstanding). As the employer, you could choose to write off the remaining loan, but this write off will be subject to tax on the employee, and to NIC on the employer.

Overall though, the company car tax saving over the 3 year period that the company car is in use, will usually comfortably outweigh the tax/NIC implications of writing off the loan balance at the end of the term, particularly where the car is in one of the higher Co2 emissions based company car tax bands. The use of the capital contribution therefore works well in most cases.

Key Facts

  • Company car tax is based on the list price of the car when new and its Co2 emissions
  • Employees can contribute up to £5k towards the cost of the car, which reduces the tax charge
  • Interest-free loans of up to £10k can be made without triggering a taxable benefit
  • A loan can therefore be used to make the capital contribution and reduce company car tax
  • An eventual loan write-off is subject to tax/NIC but a saving is produced overall

For further advice on this matter, please contact me.

Keith Witchell