Company cars and tax

If you're planning to invest in a company car, tax incentives for 2006-07 benefit firms who buy cleaner, more fuel-efficient models. Tom Whitney checks out the options
This year's Budget brought reforms aimed at encouraging businesses to take a more environmentally-friendly approach to transport. The Government has introduced a new system of road tax, Vehicle Excise Duty (VED), which rewards buyers who choose a car with low, less harmful, carbon-dioxide emission levels.

"If you are planning to buy a new car, you should consider opting for a fuel-efficient model with a smaller-sized engine," advises Croner Consulting's senior tax consultant Neil Tipping.

"There is now a higher band of VED for the new, most-polluting cars registered after 22 March 2006, set at £210 per year for petrol cars. VED rates for cars with the very lowest carbon-emission bands have been cut to zero."

Tax relief for businesses

Businesses are able to claim tax relief in the form of capital allowances on the cost of buying company cars. The amount that can be claimed annually is set at a maximum of £3,000 for each car. However, the cost of certain low-emission cars (with emissions not more than 120 grams of carbon dioxide per kilometre), registered on or after 17 April 2002 may be fully written off in the first year.

Businesses may also be able to claim tax relief for the car's maintenance and other running costs, including interest paid on loans used to buy it.

And you can recover VAT on the purchase price [as well as the fuel], if the car is used for company purposes only," says Tipping. "However, you cannot recover VAT on the car's purchase price if the car is made available for private use."

In practice, this means the car would normally be a 'pool car' (kept on the business premises at night and not taken home by an employee).

Tax for employees

How much tax employees pay on a new or existing company car depends on carbon-dioxide emissions and a car's list price on the day before it was registered. Based on the list price, the tax percentage ranges from 15-35 per cent, although the reductions for alternative fuels can reduce the charge below 15 per cent and there are three per cent supplements for most diesel cars. A new rate of ten per cent for cars with carbon-dioxide emissions of 120 g/km or below will be effective from 2008-09.

"Company cars are taxed as a benefit in kind," says Tipping. "Directors and employees who earn £8,500 or more a year must pay tax on company cars which are made available for private use."

Company drivers who benefit from fuel provided by their employer for private use may also have to pay tax. Like the company car benefit, this is collected through adjustments to an employee's PAYE code. Again, the car's emissions levels determine how much tax must be paid. Employers must also pay Class 1A National Insurance contributions on cars and fuel benefits provided to employees.