Car Benefits: Your 2021/22 Tax Guide
Car benefits are a topic which is often brought up in enquiries with our clients, so this article will go over some concepts in the interest of tax planning for the acquiring cars through businesses.
Generally, when a business owner uses their own car in the interests of their business, they can be reimbursed by their own company and will not incur tax liability – as long as they are classed as a qualifying expense by HMRC.
If they were to use a company car instead, they would have to pay income tax on the benefit received. This varies on the CO2 emissions and listing price of the car. The company would also then be liable to Class 1A NIC on the benefit.
The company will, in most scenarios, pay for the ownership (or lease) of the car and its concurrent costs provided it satisfies HMRCs golden rule when it comes to expenses, that it must be done “wholly and exclusively” for the purpose of paying the business owner. These costs will allow deductions for Corporation Tax purposes. Car depreciation also enables corporation tax relief in the form of capital allowances.
As a result, when deciding between the acquisition of a car via lease or buying it outright, one must consider the effect of the capital contributions, company contributions, business mileage, capital allowances and the factors listed beforehand amongst others.
What are the charges?
Car benefit charges are calculated from the product of the listing price of the car and the current percentage rate set by the Chancellor, which can be found on our tax rates page. The rates are determined by car CO2 emissions which are measured in grams per kilometre (g/km).
Fully electric cars are subject to this tax, currently at 1% and are set to rise to 2% for the successive tax years. This percentage varies with the range at which an electric car can cover. A pure electric range above 130 miles will also be subject to the benefit in kind rate.
|2022/23 – 2024/25||2%|
Fully electric cars have low benefits in kind, qualify for 100% capital allowances and the anti-avoidance rule for salary sacrifice is applicable. Therefore, businesses may want to consider exploring electric cars as a tax-efficient option for a company car in the future as corporation tax rates are set to increase to 25% by 2023.
Fuel benefits can be calculated by multiplying the same percentage rate used for the car benefit and the current set figure for the tax year:
In an instance where an employee has to reimburse the entire expense incurred by their employer for the provision of private fuel, no fuel benefit will arise. If the employee makes a partial reimbursement, then the benefit will be calculated to the method described above.
Employees can be reimbursed for business mileage carried out in their own cars (i.e., miles travelled wholly and exclusively for the business) at 45p per mile for the first 10,000 miles and 25p for every subsequent mile. If a fellow employee is also carried in the same car a further 5p per mile is added to the reimbursement if and only if the travel is a work journey.
This rate also applies to fully electric cars.
A director that does not receive fuel benefit but drives a company car can claim an allowance for the business mileage at a lower rate than if they were to use a car in their ownership.
Eco-friendly cars are encouraged by HMRC, indicated by the numerous associated incentives which have a considerable positive impact on the cash flow of a business.
- Writing down allowances (WDAs). Cars emitting less than 50g/km of CO2 in the 2021/22 tax year are included in the Plant and Machinery pool at an 18% WDA. Cars emitting more than the aforementioned amount is in the Special pool with 6% WDA. Hence, there is no balancing allowance on the disposal of these vehicles.
- 100% first-year allowances (FYA) on expenditure for new low emission electric cars. The car must be purchased between 16 April 2002 and 1 April 2025 and have zero CO2 emissions.
- 100% FYAs on brand new equipment installed for the purpose of electrically charging vehicles.
- 100% FYAs on new goods vehicles with no CO2 emissions.
Note that the FYAs are not available to businesses in “difficulty” or are deemed to be recovering.
15% of the leasing costs of a car are also available to claim as a reimbursement provided its emissions are less than 50g/km from 6 April 2021.
HMRC also has a company car and car fuel benefit calculator which is a useful tool to help with tax planning.
If you have any further queries or are interested in our services, feel free to contact us and have a quick chat.