Cars, loans and capital contributions. What’s the most tax efficient mix?


Having a company car used to be a luxurious perk of travelling when working for a company. However, in recent years the Tax and NI has increased so much and will continue to rise, so what’s the most tax efficient way to have a company benefit?

Company cars

A company car is taxed based on its list price and C02 emissions. The more expensive a car, the higher its emissions, the larger the Tax and NI bill attached to it. This is why a tax scheme may be beneficial.

Example with no scheme:

John is a Director of Johns IT Ltd, and for the year 2017/18 he had use of a company car.

List price £30,000 with C02 emissions of 180g/km.

(The taxable amount is 35% of the list price  £10,500)

As John is a higher rate tax payer he’ll pay £4,200 (10,500 x 40% ) in tax.

The company has to pay Class 1A NI  £1,863 (£10,500 x 13.8%)

Ignoring any increases in the taxable amount, over 3 years, the total tax and NI is £18,169. (£4,200+£1,863 *3)

Capital contribution

The taxable amount can be reduced by the director / employee making a capital contribution. This reduces the list price of the car . The maximum contribution that can reduce the tax charge is £5,000.

Example with capital contribution:

List price £30,00 reduced by £5,000 Capital contribution = £25,000 List price.

This reduces the Tax and NI by £2,825. (£5,000 x 35% x (40%+ 13.8%) x 3 years).

For this benefit John would need £5,000 to contribute to the car upfront. (Bearing in mind the implications of depreciation and wear and tear of the car).

If However, the company borrowed John £5,000, at the end of the 3 years there would be £2,500 contribution due back to John which the company could keep,  and write of the remainder of the loan meaning an overall tax and NI saving.

Be wary of the 32.5% temporary tax when lending to directors which could defeat the object of the tax saving.

Disclaimer:

This is a blog post based on articles written on line with made up numbers to give an idea of the tax implications of company cars. This is not meant as direct tax advice, and any advice sought for the circumstances above would need to be more on an individual basis.

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