Directors of a limited company can use a car, and their business pays for it. HMRC applies a tax benefit in kind tax charge also called BIK

We must focus on whether limited company directors should purchase a car through their own limited company or in their name. A company car for directors can provide some benefits. Company cars for directors can also have some tax disadvantages you need to mitigate.

Business owners and directors need to consider the tax issues surrounding a car purchase through a limited company. There are several tax dis-benefits:

Directors must answer the critical question, “is it worth having a company car?”

– Income tax for the employee for the car

– Income tax for the employee for the fuel paid for by the limited company

– The limited company charges national insurance for providing you, the director/employee, the company car

 

Sarah’s own limited company provides her with a Diesel BMW 218i M Sport Coupe. The car has a price of £30,000 and a Co2 emissions value of 170g/km. From a cash flow perspective, it is worth balancing buying the car outright and paying a money lease payment.

As a company director, she knows she will do 8,000 business miles per year. She may spend a further £4,000 per annum on the road tax and fuel.

From the HMRCs car benefit online calculator, we can see that:

	Basic rate taxpayer	High rate taxpayer
Car benefit charge (List price) (2021/2022)	£11,100	£11,100
Company Car Tax (2021/2022)	£2,220.00	£4,440.00
Company Car Fuel Tax (2021/2022)	£1,820.40	£3,640.80
Total tax charge (2021/22) for the individual	£4,040.40	£8,080,80
Employer national insurance charge of providing the above (based on the car benefit and fuel benefit) £11,100 X 13.8%	£1,531.80	£1,531.80
Total tax paid by Sarah (given she owns the company)	£5,572.20	£9,612.60
Less: corporation tax  saving on the actual fuel and road tax costs £4,000	(£760)	(£760)
Less corporation tax saving of the employers 13.8% NIC charge (£1,531.80 X 13.8%)	(£291)	(£291)
Net ongoing tax for having the car	£4,522.20	£8,562.60

As a limited company owner, Sarah will pay a total tax liability of £4,522.20 as a basic rate taxpayer and £8,562.60 as a high rate taxpayer by having a company car.

The tax paid as a high rate taxpayer is 28.5% (£8,562.60 divided by £30,000). This is a lot of tax to pay.

In addition to this, she will be required to complete a benefit in kind P11D form to notify HMRC that her limited company has provided her with a company car. A P11D form must be submitted to HMRC no later than 22 July.

Company cars for directors may mean that directors have higher tax rates to pay than they did without a company car. That is because they will have a benefit in kind charge

So, is it worth having a company car for you?

You also need to consider the below costs to say who will pay for them and if there is an equal benefit in kind tax charge for them

– Car itself (answered above)

– Care maintenance

– Car insurance

– Care repairs

– Car fuel (answered above)

All of the above costs need to be considered for the UK limited company as it will get a corporation tax relief and for the individual who may pay greater BIK tax rates.

A note about electric cars

From 06 April 2020, the BiK brackets were substantially revised, with the taxable figure for a zero-emissions electric vehicle dropping from 16% to 0%.

The taxable figure rises marginally from 1% in 2021 and 2% in 2022, while the Budget confirmed that the 2% rate would be maintained through to the 2024/25 tax year.

The Government sets BiK tax rates to encourage employers and company car drivers to choose vehicles with lower CO2 emissions like pure electric cars or plug-in hybrid company cars for directors.

The Benefit in Kind tax band change was also changed retrospectively, meaning that company car drivers who took delivery of a fully electric company car before 06 April 2020 also benefit from the 0% change.