As reputable tax advisors, there are many advantages to running your own business, like the freedom of being your own boss, the greater control, and possibility of lucrative rewards. But there can often seem like thousands of things you need to know to run it successfully.
Paying tax, and just the right amount of tax for your circumstances, is certainly not particularly simple. It’s one of the main reasons you should appoint an accountant from the very start of your business.
One area we’re often asked about is the company car, the tax surrounding it, and if it’s worthwhile.
When you’re working for someone else, and a company car is one of the options, then you’ll still have to look into this and the ‘Benefit in kind tax’ (BIK) might make the decision for you and you may decide to buy, rent, or lease the car personally.
It’s similar when you run your own business. Working out whether it’s worth it or not is tricky so let’s help you consider the options.
The simplest way to look at this is whether or not you’re better off (paying less tax) when you’re putting all the costs of the car through the business as a business expense, or paying yourself more and running the car as a person.
It’s all down to the car that you choose…
The CO2 emissions are the key to this. The tax is based on the effect the car has on the environment and is in line with many other tax benefits such as road tax or congestion charging in London. So electric and hybrid cars are where the clever money’s at.
From April 2020, although BIK calculations will still be based on emissions, they’ll also be assessed on the mileage range of electric vehicles. So, if you have an electric car that has a higher range, you’ll pay less BIK tax. It’ll be a sliding scale, but the lowest tax bracket will be just 2%, which is incredibly low!
It’s not all about electric though, and here’s the key stat to look for:
- The CO2 recorded by the manufacturer needs to be below 50g/km.
You’ll usually find this data on the technical specifications page for your car on the main dealer or manufacturer’s website.
Of course, electric cars fit the bill here and hybrid cars are also a good option, but some petrol and diesel cars do come in just under the CO2 benchmark. You just need to do some research first or ask us or your accountant.
But there’s a problem with electric cars… the cost (right?)
Many people are put off by electric cars not only because of the new technology and how to charge them, but the cost of the cars themselves can be higher.
Take BMW for example:
At the time of writing this, the base BMW 1 Series starts at £23,000 whereas the similar sized i3 electric version comes in at £35,000!
There are currently government grants which could save you up to £5,000 though.
Even so, this is still more expensive, isn’t it?
Actually, when you look at the running costs, the road tax, and then the company tax savings, you might see that an electric car is a better investment in the long run.
Charging? Well, yes this is also a worry if you’re not currently running an electric car but there are still some government grants available to get the charging docks installed on your drive. Availability in towns and motorways is constantly improving too. It is the future of motoring so the infrastructure will catch up!
So yes, electric cars are more costly up front (even with a grant) but over the first few years you’ll soon be saving money on a lot of the running costs of that car. If you use it as a viable option for a company car it’s a cheaper option in the long run.
So why does having a company car reduce your tax?
Let’s be fair, this is purely a decision based on tax and which option is the most tax-efficient one for you. It’s what we’re constantly proud to say we do for our clients.
So, why (and when) is a company car better for tax?
Well, simply put, when you put the entire cost of running your company car through the business, you’re going to reduce the amount of profit your company makes and this will in turn reduce your corporation tax.
More costs = less profits and less tax on profits.
If you were to pay yourself more dividends to pay for the car, for example, then this would cost more as you’d increase your income tax.
Isn’t the benefit in kind tax going to affect me?
Yes, there are benefit in kind taxes associated with a company car, but these are very low in comparison – and when you choose a car with low enough emissions, even more so.
The even better news is that the benefit tax associated with a company car with low emissions is set to reduce even further in the coming years, meaning that your tax will too.
What’s the other option?
Ordinarily you’d pay for your car like this:
- Earn profit in the company and pay corporation tax on that.
- Pay yourself dividends out of the company and then pay income tax.
- Then you’d pay your car expenses privately from the earnings you pay yourself.
Now, if you make that personal car a legitimate company car and run all the expenses through the business then you’re actually saving tax three times.
- Saving on corporation tax.
- Saving on income tax.
- And then it’s tax deductible as an expense too!
You can see, when you choose the right car which determines the benefit in kind tax that you’ll pay, a company car or van can be a really good and tax-efficient choice for you.
You could reduce your corporation tax and your personal tax if you choose well.
This option isn’t suitable for everyone though, and you must choose the right vehicle in the first place.
If you do need any help then feel free to give us a call on 02475 185286 and we’d be happy to help you.