When it comes to the question of whether one should have a company car or take a car allowance instead, most people are unsurprisingly confused. As company car benefits keep increasing, so does the tax burden. So is it more beneficial? Or should you, if your Employer provides for it, take a car allowance instead?
The conclusion is that a company car is going to be more tax efficient in the following two circumstances:
- The car has low CO2 emissions coupled with a low level of business mileage.
Car CO2 emissions 123g/km List price of car when new £11,360
Car benefit for 2013/14 – 16% x £11,360 = £1,817
Assuming higher rate taxpayer – tax due £1,817 @ 40% = £722
If the private mileage in the year is 10,000 miles this equates to tax per mile at 7.22p (722 ÷ 10,000). Based on “What Car” figures of 12,000 miles per annual total mileage over 3 years, the true cost per mile is 32p, providing a saving of 24.78p.
- The second scenario occurs when business mileage is high, resulting in a tax deductible car allowance which does not cover the true business cost.
Car CO2 emissions 264g/km List price of car when new £67,050
Car benefit for 2013/14 – 35% x £67,050 = £23,467
Tax due @ 40% = £9,386
On business mileage of up to 10,000 pa, an allowance at 45p per mile could be claimed resulting in a total claim of £4,500. The real cost according to “What Car” is £15,289.
After 10,000 miles the rate reduces to 25p per mile, so if the business miles were 20,000 the amount claimed would be just £7,000 whereas the true cost is £24,000 – again according to “What Car.”
Each case needs to be looked at independently, based on the type of car being provided and the private and business miles being run. In the circumstance of an employee being offered a car allowance, if they use their own car this will also have a bearing on the outcome. The answer is not always straightforward, but then when has anything to do with tax ever been!!
Should you require any further details please contact Green & Co.
Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.