By Pamela Phillips
As the government has brought in tax incentives to encourage businesses to buy brand new electric cars, this might just be the right time for you to buy your next car through your company.
Up until now, it has not usually been a good idea, from a tax perspective at least, to buy a car through your company. This is all about to change from 6 April 2020.
What are your options?
As a company director, you have a choice when it comes to buying a new car. You can either take money out of your business and use that to buy a car personally, or you can buy the car through your company.
Buying the car personally
To buy a car personally you will usually first need to take money out of your business so you can pay for the car. This normally means declaring an additional dividend on which you will pay tax at either 7.5% or 32.5% depending on your income bracket.
Buying a petrol or diesel car through your business
If you buy a car through your business you will save tax by not having to declare a dividend to get the cash out of your company, however, there are other significant tax implications to be aware of.
Benefit-in-kind charge on petrol and diesel cars
When your company buys you a car this is treated as a benefit-in-kind on which you are personally taxed each year.
This taxable benefit can be quite steep and is based on the list price of your car. It also varies depending on fuel type and CO2 emissions.
In addition to any tax, you will pay personally, your company will also have to pay employers NIC on the value of the benefit-in-kind.
The mechanics of this are that either a) once a year your company issues you with a P11d which shows the taxable benefit that needs to be included in your self-assessment tax return, or b) you run the benefit through the payroll.
Here is an example of how costly a petrol company car can be to you personally.
The 2020 Mercedes-Benz GLB 200d AMG Line has a P11d value of £36,535 and emits 133g/km of CO2, putting it in the 30% BIK band. Therefore the BIK value is £30,535 x 30% = £10,961.
If you are a basic rate taxpayer this will cost you an extra £2,192 p/a in tax and if you are a higher rate taxpayer this will cost you an extra £4,384 p/a!
How can buying an electric car through my company save me tax?
There are a number of tax savings that can be made when buying an electric car through the company.
Benefit-in-kind charges on fully electric cars
From 6 April 2020 the taxable benefit for electric cars will reduce to zero. In the 2019/20 tax year, the taxable benefit is 16% of list price so this is a big change.
The benefit-in-kind charge will then increase slightly to 1% in 2021/22, then 2% in 2022/23.
As an example, the 2020/21 tax year the benefit in kind value of an £83,690 Tesla Model X would be £nil!
Eligible for salary sacrifice schemes
Salary sacrifice schemes allow employees to reduce their gross salary in exchange for the benefit of driving the fully electric company car. This means that the employee and employer can save National Insurance (which is calculated on a lower gross salary amount).
Corporation tax savings with electric cars
Between 1st April 2020 and 1 April 2021, when a company buys a brand new electric car outright or through a finance lease, it will qualify for 100% first-year allowance. This means that the cost of buying the car is a deductible cost for corporation tax.
Installing a charging point at work is also currently an allowable cost for corporation tax.
Other benefits of buying an electric car
- You are saving the planet through reduced CO2 emissions!
- Your fuel costs reduce significantly, which is especially great if you travel a lot for work.
- No road tax payable on electric cars with a list price of under £40,000.
- If you drive into London you will no longer need to pay the congestion charge if your car is fully electric
- There is no benefit in kind to you personally if you charge your company car at work
- It is possible to reclaim 4p per mile from your company to cover the electricity costs when charging at home or at a public charging point.
Please get in touch if you are thinking of buying a car
Every situation is different so please always do speak to us first before making this decision and we can give you specific advice for your personal situation and the particular car you are thinking of buying.