Sarah Bradford takes a look at the 2017/18 company car tax landscape.
Despite year-on-year tax hikes, company cars remain a popular benefit. But what does the 2017/18 company car tax landscape look like, and what should company car drivers bear in mind when seeking to minimise their tax bill while continuing to enjoy the convenience of a company car available for private use?
The rules
The amount charged to tax in respect of the benefit of a company car – the cash equivalent value – is an appropriate percentage of the list price, as adjusted for periods when the car is not available, capital contributions, and contributions towards the private use of the car. The list price is increased to reflect the cost of any optional accessories added to the car.
The list price is essentially the manufacturer’s price when new. It does not matter what price was actually paid for the car and even whether the employer purchased it second-hand. Likewise, it is irrelevant if the employer leases the car or purchases it outright – the list price remains the starting point for the cash equivalent calculation.
Trap:
The cash equivalent is always calculated by reference to the list price, even though the value of the car depreciates. Where a car is purchased second-hand, the value and purchase price may be significantly lower than the list price by reference to which the benefit is taxed.
Appropriate percentage: lower CO2 emissions = lower charge
The appropriate percentage is linked to the level of the car’s CO2 emissions. For 2017/18, the appropriate percentage ranges from 9% for cars falling within the 0 to 50g/km range to 37% for cars with emissions of 190g/km or more. A table of appropriate percentages is available on the Gov.uk website at www.gov.uk/government/statistics/taxable-benefits-in-kind-and-expenses-payments-company-car-tax-rules-2005-to-2016. A supplement of 3% applies to diesel cars, subject to the overall maximum charge of 37%.
The appropriate percentages were increased by two percentage points for the 2017/18 tax year. The effect of this that an employee who has not changed his or her company car, pays tax by reference to a higher amount for 2017/18 compared to 2016/17, even though the car is a year older and has done more miles and is likely to have depreciated.
Example: The same company car in 2016/17 and 2017/18
Molly has a company car that cost £28,000, and which has CO2 emissions of 150g/km. For 2016/17, the appropriate percentage was 27%. It is increased to 29% for 2017/18.
The cash equivalent value of the benefit of Molly’s car is £7,560 in 2016/17 and £8,120 in 2017/18. Assuming Molly is a higher rate taxpayer, the associated tax bill is £3,024 in 2016/17 and £3,248 in 2017/18.
Although she has the same car in both years, she will pay additional tax of £224 in 2017/18, despite the car being a year older with higher mileage.
Tip:
Choosing a low emission car will save tax. Had Molly chosen a car with CO2 emissions in the 0-50g/km band, the cash equivalent of the benefit (assuming the same list price of £28,000) would be £2,520 (£28,000 @ 9%) and the associated tax £1,008 – a considerable saving.
Fuel for private mileage
If fuel is also provided for private mileage in a company car, a further taxable benefit arises. The amount of tax is found by multiplying the appropriate percentage used in the company car calculation by the fuel multiplier for the year. For 2017/18, this is set at £22,600 – up from £22,200 for 2016/17.
Assuming that Molly from the above example also receives fuel for private mileage, she will be taxed on an amount of £6,554 (£22,600 @ 29%) in respect of the provision of the fuel, generating an additional tax bill of £2,621.60.
Trap:
The fuel charge will rarely be worthwhile unless private mileage is very high. Where the list price is less than £22,600, for 2017/18 the fuel will attract a higher tax bill than the car.
Beware the cash alternative
New valuation rules apply from 2017/18 where benefits are provided under a salary sacrifice arrangement or where a cash alternative is offered. Unless the car is a low emission car, the new rules will mean that where a cash alternative if offered, the amount taxed is the higher of the cash alternative and the cash equivalent value.
Particular care should be taken where a cash alternative is offered to the provision of fuel. An employee with low private mileage opting for the cash alternative could conceivably be taxed on a higher amount than the cash actually received as the cash equivalent value may well be more, particularly if the car has high CO2 emissions.
Practical Tip:
When choosing a tax-efficient company car, the rule is to go cheap and green - the lower the list price and the level of CO2 emissions, the lower the tax charge.
