Tax & Accounting News

Cutting Tax On Company Cars

05/06/2009

When a company car driver adds an optional extra, such as a satnav system, to their vehicle it will cost them extra in income tax, on top of the purchase price. The rate of tax is based on the vehicle’s CO2 emissions and the higher the emissions, the greater the percentage of the list price that is treated as benefit-in-kind (BiK) – including the cost of any extras fitted.

However, there are a couple of ways to reduce this tax bill. Firstly, there is no tax on extras if they are to be used for business. HM Revenue and Customs gives the example of a tow-bar that is used to pull a trailer for carrying equipment, but the same exemption could reasonably be said to apply to a satnav system if the driver’s job involves a lot of travel to different locations. Details of such purchases need to be included on the employee’s P11D (end of year benefits and expenses) form.

It would be more difficult to justify a tax exemption for a ‘luxury’ item, such as a DVD player or sound system, but even here it is possible to reduce the amount payable. The cost of extras is only added to the list price of the car if they are fitted to the vehicle – the BiK for items that are not fitted will be calculated at a flat rate of 20 per cent of the cost of the extra. Therefore if the company car is a higher-emission vehicle with a BiK rate of more than 20 per cent, it makes sense to purchase separate, detachable extras; conversely, if the car has a BiK rate of less than 20 per cent, adding fitted extras will cost less in tax than detachable versions.

Employers National Insurance Contributions (NICs) are paid on BiK at a rate of 12.8 per cent – so reducing the BiK charge on a car accessory will also help a company cut its NIC costs.

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