If you are thinking of purchasing a company car, you may have to pay a taxable benefit in the form of income tax in respect to the private use of the car. However, from April 2020 there will be no income tax payable on certain cars.
When calculating the taxable benefit on your company car, you must first work out the list price of the car i.e when it was registered brand new. Therefore, this may not be the actual price you paid for the car!
The next thing to figure out is how many Co2 emissions your car produces. The higher the Co2 emissions your car produces, the higher the taxable benefit will be. Once you have got the number of Co2 emissions, you must refer to the table produced by HMRC to understand what % band your Co2 emissions fits into. Note: There is an additional 3% added on to the relevant % for diesel cars because they are less environmentally friendly.
Period of Ownership
The third element is to work out how many days / months you have had the company car for during the tax period (6th April to 5th April).
List price x Co2 % x Period of Ownership = Cash Equivalent
The cash equivalent value is then entered into your P11D (due 6th July every year). You will then be subject to income tax on the cash equivalent value.
A separate taxable benefit will arise if you decide that your company will be paying for the fuel cost of your company car. To work out the taxable benefit you simply multiply £23,400 by the Co2 % you worked out above. This taxable benefit is also reported on your P11D.
Income Tax / Employer NI
The rate of tax you pay depends on your other earnings and your tax rate band. In the tax year 2019/20, if your earnings are below £50,000 then you are a basic rate taxpayer meaning that you will pay 20% income tax on the taxable benefit. The cash equivalent / taxable benefit is basically an addition to your income but in the form of a non-cash payment.
In addition to the income tax, your company will have to pay employer national insurance at a rate of 13.8% on the taxable benefit! So yes, you get hit with tax twice on one benefit…
April 2020 – The Sweet Spot
If you have an electric car or thinking of buying one during the tax year 2019/20, the Co2 rate % is 16% even though your car does not produce any Co2 emissions!
However, from April 2020 this is all going to change. From April 2020, the Co2 % rate for zero emission cars will be 0% for the tax year 2020 / 2021. That means there will be no taxable benefit for you! Furthermore, as an electric car does not use fuel, there will be no additional benefit on this either!
A zero taxable benefit also means that there will be no employers national insurance to pay either.
Buying a new electric car through your limited company will also qualify for First Year Allowance. This basically means that the cost of your car will be used to reduce your corporation tax liability.
The Co2 % rates on electric cars are estimated to be 1% for the tax year 2021/2022 and 2% for 2022/2023. You may wish to consider eliminating this taxable benefit by making a personal contribution to your company for the cost of the vehicle.
You may incur electric costs for charging your vehicle in which case you can claim back 4p per business mile from your company completely tax free. You will want to factor in this cost when working out your corporation tax liability and when working out your strategy for extracting money from your company.