Company Cars What Hazards Lie Around The Corner For Car Benefits?

Peninsula Team

January 29 2010

A startling rise in the tax charge on company cars at the luxury end of the market is just around the corner for some high earning directors and employees from 6th 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 £80,000 x 35% = £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 6th April 2011

From 2011/12 tax year 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 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.

For a director or employee earning well in excess of £150,000 and driving a car costing £140,000 the tax payable on the benefit arising will be as follows;

2009/10 £11,200
2010/11 £14,000
2011/12 £24,500

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 effect of these changes for most drivers will be to increase the percentage used by 1% in both years. For the majority of director 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 another £80 for the following year.

Although this change is in itself relatively insignificant the cumulative effect of the changes is to further increase the tax burden of company cars on employees whilst increasing the Class1A national insurance contributions payable by the employer.

Whilst any 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.

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. Other alternatives to be considered are a salary sacrifice scheme or a “pick and mix” menu of different benefit options with varying costs.

If you want to know more about the proposed changes or would like to know how you will be affected, call the TaxWise Advice Service on 01455 852555 and one of our tax specialists will be happy to help.

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