Q. As a director of a successful SME a company car is provided to me that forms part of my remuneration package. I have been told that with effect from 6 April 2011 the rules and scale charges on which tax benefits on company cars are charged will change. Is this correct, what changes are to be introduced and what affect will these have on a higher rate tax payer? A. The information you have received is correct and an alarming rise in the tax charge on company cars at the luxury end of the market is just a few weeks away for some high earning directors and employees, with effect from 6 April 2011. Under the current system the car benefit is calculated by applying a percentage to the list price of the car, including any accessories when new. This percentage depends on the car’s CO2 emissions figure and ranges from 15% to 35%. However the maximum list price to which the percentage applies under current legislation is capped at £80,000. This means that the highest annual car benefit an employee or director could face in any one tax year is currently 35% of £80,000, which is £28,000. At the current top rate of tax of 40% this results in an income tax liability of £11,200 per year. The major change introduced by the Chancellor in his last budget is the removal of the £80,000 price cap with effect from 6 April. From tax year 2011/12, the removal of the price cap will result in the actual list price of the car when new being used to calculate the tax benefit arising. In addition to this change you also have to factor in that the top rate of tax in the above tax year will be 50% for those individuals with taxable income of more than £150,000, including the value of taxable benefits. The resulting additional liability in some cases will be alarming. The Chancellor also announced other less dramatic changes including the lowering of the emission bands to which the appropriate percentage applies by 5g/km in 2010/11 and by a further 5g/km in 2011/12. The affect of these changes for most drivers will be to increase the percentage used by 1% in both years. For the majority of directors and employees who have cars with a list price when new of below £80,000 and earning less then £150,000 the change will mean an additional £80 of tax for 2010/11 and a further £80 in the following year. Whilst the Government is facing the current budget deficits it is difficult to see any lightening of the tax burden placed on company cars in the foreseeable future especially when also considering environmental targets on CO2 emissions. Now may be a good time to consider alternative ways of rewarding directors and employees such a paying the maximum tax free mileage allowance for business use of their own vehicles especially where the business mileage does not exceed 10,000 miles per year. Other alternatives would be to consider a salary sacrifice scheme or a “pick and mix” menu of different benefit options with varying costs. TaxWise is available to help answer any tax queries. Just call the Advice Service on 01455 852555 and one of our specialists will be happy to help.