In April 2018 the tax and National Insurance (NI) charges for company cars rose again. The maximum charge did not increase but the carbon dioxide (CO2) emissions bands moved so that the majority of company car drivers will pay more in 2018/19 and in 2017.18 for the same car.
However, if you use your business to run a car for a family member, there are ways to make this cheaper than personal ownership.
Paul is a director shareholder of a company. He is a higher rate taxpayer and his daughter needs a car so he agrees to fund it for her. His budget is £13,000. To keep annual costs to a minimum, his daughter selects a car with CO2 emissions of under 95g/km. She will pay the running costs such as insurance and servicing. How do personal and company ownership compare with each other?
Paul’s daughter intends to keep the car for four years then buys a replacement herself when the expected value is £4,750. This means the net cost to Paul is £8,250 (£13,000 – £4,750). Paul takes extra dividends of £12,222 from the business to cover this, which after tax at 32.5% leaves £8,250.
However, if the company owned the car the cost over the four years would also be £8,250 but the business receives corporation tax relief at 19%, which makes the net cost to it £6,683. Paul must pay tax on the company car of £988 per year. He takes dividends each year of £1,464 to cover the tax bill, which is £5,856 over the four years. After 32.5% tax that is £3,952. The company has to pay Class 1A NI on the car benefit, which is £1,104 after corporation tax relief. The total cost to the company is £13,643 (£6,683 + £5,856 + £1,104).
These calculations indicate that personal ownership by Paul’s daughter is the cheaper option – but is it?
If the company pays the running costs and Paul reimburses it, and his daughter reimburses him, this reduces the tax and NI payable on the company car option. This could tip the balance in favour of the company owning the car.
For the reimbursed expenses to reduce the tax and NI, the company must make it a condition of it providing the car. This must be put in writing in case HMRC needs to see proof.
So, let us assume the average annual cost of insurance, road tax, servicing, etc., is £1,700. If the company pays this and requires Paul to reimburse it, the corresponding amount on which he is taxed for the car is reduced by the same amount. Over the four years of ownership that is a tax saving of £2,720. Therefore, Paul needs correspondingly fewer dividends from the company to cover the cost. The company also saves money. Paul’s daughter’s financial position is neutral; she simply reimburses Paul for the running costs instead of paying them direct.
Therefore, in this example, the tax savings achieved by simply changing how the running costs are managed is over £4,500. This makes company ownership the cheaper option by far.
If you would like to work out if this could benefit you and your family members please call Vincent and Co on 01803 500500 and we will be delighted to hep you to work out the benefits.