The idea of being provided with a brand-new car, courtesy of an employer with no initial costs or maintenance to worry about, may seem an attractive proposition. However, there are a number of points to consider from a tax perspective.
When an employee is provided with a company car, which is available for private use this is taxable on the employee. The car, and certain associated costs, will be subject to a tax charge on the employee, based on the original list price and its CO2 emissions. It follows that the lower the list price and the lower the emissions, the lower will be the income tax charge.
Where fuel is provided by the employer and the employee benefits from private mileage costs being met, a separate fuel benefit arises. This can prove expensive for an employee where the car is used for limited private journeys. In such cases it is likely to be better for the employee to be reimbursed his business mileage costs by his employer.
The optimum position for each employee will depend on a number of specific and variable factors and each case should therefore be individually considered. However, as a rough rule of thumb if an employee uses a company car predominantly for business trips with limited private mileage then it is likely that he will be better simply paying for his own private fuel rather than have his employer pay for it.
So-called cleaner cars are an attractive option. The method used to calculate car benefit means that a car with a lower level of CO2 emissions will attract a lower benefit in kind. The level of CO2 emissions determines a percentage to be applied to the list price of the vehicle. Lowering the emissions will therefore lower the taxable benefit. We are now starting to see a range of lower emission cars to attract employers.
Fully electric cars are an attractive option with a nil tax charge for new cars for the current tax year, rising to 1% in 2021/22 and 2% in the following year. With the average fossil fuel car commanding a tax benefit of around 28% of the list price, an electric car can provide the employee with a significant opportunity to manage down his tax cost significantly.
It is fair to say that the company car is evolving. It is difficult to predict the route map over the next three to five years; more electric cars are certain to feature as mileage range continues to improve, more models become available and prices drop. The tax breaks over the next two years are also helpful. Alongside this we are seeing a response from the producers of our traditional vehicles.
It will be interesting to see how car fleets evolve as cars continue to develop and indeed our working patterns do as well. If anything, the recent Covid-19 (Coronavirus) pandemic has told us we can work more from home and travel less which may further bring into question the long-term future of the company car.
Dave Hedges is a partner, head of employment tax at Wilkins Kennedy.