How To Calculate Tax On Company Car

Calculating taxation on a company car is a crucial part of understanding and setting up an effective tax strategy. Understanding how this works is essential for business owners, as it can make a huge difference in terms of their financial performance. This article will provide background information, relevant data and perspectives from experts, while also offering useful insights and analysis on the topic.

Understanding Company Cars and Taxation

A company car is a vehicle provided to an employee, owned by the company, for purely business use. There are significant tax implications for both employer and employee when taking advantage of the company car tax rules. For the employer, providing a company car to an employee can have particular tax advantages, particularly when it comes to taking advantage of tax deductions for operating costs. For the employee, there are particular risks associated with taking a company car, such as National Insurance contributions and potential capital gains tax (CGT) liability. In order to be able to make the most of the company car tax rules, it is important to be aware of the taxation implications.

For employees, the tax on a company car is calculated using a system called ‘ Benefit in Kind’ (BIK) taxation. This system takes into account a variety of factors in order to ascertain if a company car will incur a tax charge or not. These factors include the list price of the car, the age of the car, its CO2 emissions, the annual mileage limit and the amount of time the employee will use the car.

Capital Gains Tax Implications

It is also important to understand the potential capital gains tax (CGT) implications of taking a company car. CGT is a tax that applies to the capital gains that result from the sale of an asset. Therefore, if an employer decides to sell the vehicle, the CGT will be calculated on the difference between the sale price and the purchase price of the vehicle. It is important to note that if the employee is paid more than the purchase price of the vehicle, they may be required to pay CGT on the difference.

It is also important to be aware that any CGT calculation will also take into account the cost of any improvements or additions to the vehicle since its purchase. Any additional expenditure on modifications, such as a paint job or air conditioning, will be added to the purchase price for the purposes of calculating CGT.

National Insurance Contribution Liability

The National Insurance Contributions (NIC) liability can also be affected by the provision of a company car. An employee will be liable for NIC payments for any earnings relating to the use of the car, such as reimbursement for fuel costs or car maintenance. As such, it is important for employers to be aware of the NIC payments that would be incurred when taking advantage of the company car tax rules.

In addition, where an employee is provided with a company car, they may be required to pay Class 1A NIC, which is calculated at 12.8% of the list price of the vehicle. This is a flat rate, so all cars are subject to the same tax rate regardless of their value.

Mileage Reimbursement

The provision of a company car does not negate the need for an employer to provide mileage reimbursement for employees. Employees are still entitled to 1p for every business mile that they travel in their own vehicles, on top of any mileage allowance provided for company cars.

If an employee is provided with a company car and is also claiming 1p per business mile for their own vehicle, they may be required to pay additional tax. This is because the benefit of a company car is reduced by any reimbursement that is received by the employee for the use of their own vehicle. It is therefore important to calculate the cost of the company car, as well as the amount of mileage reimbursement, in order to ascertain the potential tax implications for the employee.

Tax Advice

It is always advisable to seek professional advice when it comes to setting up a tax strategy for a company car. An accountant or tax adviser will be able to provide bespoke advice based on the particular circumstances of the business, and can ensure that the most tax efficient strategy is adopted. They will help to ensure that the company and its employees are taking full advantage of the company car tax rules, and can provide valuable guidance in areas such as calculating CGT, NIC contributions and mileage reimbursement.

Conclusion

Calculating taxation on a company car is a crucial part of understanding and setting up an effective tax strategy. It is important to understand how the tax implications of taking a company car work, as this can make a huge difference in terms of the financial performance of the business. By understanding the company car tax rules, employers and employees can make the most out of this business arrangement and benefit from the tax advantages that come with it. In addition, it is always advisable to seek professional advice when it comes to setting up a tax strategy for a company car.

Marjorie Turcios is a seasoned leader and management expert with over 25 years of experience. She has held various leadership positions in private industry, government, and education. She is an advocate for creating win-win solutions and has worked to create successful, lasting change in corporations and organizations. Marjorie is an award-winning author of several books on leadership, mentoring and coaching, and effective communication skills. Her passion is to help others discover their potential and reach new heights in their professional life through her writings. Marjorie resides in Dallas, Texas where she enjoys spending time with her family, traveling to different places around the world, and speaking at conferences about her areas of expertise.

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