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HMRC introduced a generous company car tax scheme to encourage small business owners to do more for the environment, by rewarding the use of reduced-CO2 emitting vehicles.
The scheme concerns company cars only. Historically, providing a company car to an employee has been very expensive from a tax point of view. For certain cars, this is no longer the case. Cars with CO2 emissions of <75g per kilometre driven qualify for 100% allowances within the company; this means that if the car costs £20,000 you can offset the whole amount against your company profits in year one.
You can estimate how much tax you'll pay with HMRCs company car and fuel benefit calculator.
The benefit in kind charge (the tax payable by the employee) is also reduced to 16% of the list price of the car for cars with a CO2 emission rate of 51 – 75g/km (as of 6 April 2019) and 1% with a CO2 emission rate of 0-50g/km. These rates are increased by 4% for diesel cars due to a 4% diesel supplement and 0% depending on whether the car is certified to the Real Driving Emissions 2 Standard.
From the start the 2018/19 tax year, the diesel supplement relating to the car benefit and the car fuel benefit charge increased from 3% to 4% for all diesel cars that were not certified to meet the Real Driving Emissions 2 (RDE2) standard which is also known as ‘Euro 6d’.
How then does this relate to actual tax savings? Take the example of a Toyota Prius with a list price of £20,000 and a CO2 emission rate of 75g/km. In year one, the company can write off the whole cost of the car against its profits, translating to a tax saving of £20,000 x 19% i.e. £3,800.
The benefit in kind on the employee would be £20,000 x 16% = £3,200. This would cost a higher rate taxpayer £1,280 in tax, with the company paying an extra £441.60 per year in Class 1a National Insurance.
This then is a tax saving of £2,078.40 in year one. Remember as well that the company will pay for all the repairs, tax, business fuel and insurance on the car, reclaiming VAT where applicable and obtaining corporation tax savings on all costs.
So, the tax breaks are good, but are the cars that qualify worth the extra savings? Personal choice of course, but you may want to check on the following link for further details and to check those currently available below:
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