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Driving down the cost of company cars

With the soaring cost of car fuel, any way of saving on motoring costs is welcome. The government’s advice is to make use of the tax reliefs available on environmentally friendly cars, though until now the range of cars with carbon dioxide (CO₂) emissions low enough to qualify for tax benefits has been very limited. Fortunately, the industry is now starting to produce more that do qualify, though the choice is still largely restricted to compact small engined cars.

If your business is buying a car and you are able to find a suitable one with CO₂ emissions of 110g/km or less, you can write off the whole cost against tax in the year of purchase by claiming a 100% first-year capital allowance. For cars with higher emissions, and all used cars, tax relief is limited to a writing down allowance of 20% of the cost, with an upper limit of £3,000 where the car costs more than £15,000. Cars do not qualify for the new annual investment allowance, which gives immediate tax relief on up to £50,000 a year of expenditure on equipment.

From April 2009, the writing down allowance is expected to go down to 10% on cars with CO₂ emissions above 160g/km. This means it will take much longer for a business to receive tax relief on a less environmentally friendly car.

Employees can be taxed heavily on the benefit of a company car, but much less so on a low emission model. Since April 2008, an employee who drives a petrol-fuelled car with CO₂ emissions of 120g/km or less is taxed on only 10% of the list price. For a diesel car, tax is charged on 13% of the list price. These lower percentages can make a low emission company car a worthwhile benefit for an employee compared to the cost of owning a car personally.

You will also pay little or no vehicle excise duty on cars with CO₂ emissions up to 120g/km. Up to 100g/km, car tax is nil; and with 101-120g/km the tax is currently £35.

With any company car decisions, including whether to lease or buy, it is worth making a detailed calculation of costs and benefits for the employee and the business as there are so many variables to consider. We would be pleased to help you with this.

This newsletter is for general information only and is not intended to be advice to any specific person. You are recommended to seek competent professional advice before taking or refraining from taking any action on the basis of the contents of this publication. The newsletter represents our understanding of law and HM Revenue & Customs practice as at August 2008.