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Commercial Angles' Newsletter - June 2001

Company Car Tax from April 2002

The personal tax liability of an employee provided with a company car is in two parts: a charge for the private use of a vehicle, which depends on the list price of the vehicle when new, the age of the vehicle and the annual business mileage of the vehicle; and a charge for fuel for those employees whose employers pay some or all of the fuel consumed for private use. In addition the company is assessed for Class 1A National Insurance contributions at 11.9% of the employees' assessments.

From 6 April 2002, the personal tax liability assessment for the provision of a company vehicle will be based on the carbon dioxide emission of that vehicle and there will be no allowance for business mileage. Many high business mileage employees will face higher personal tax charges next year.

Present tax charge

Company car tax is collected by amending an employee's tax code. The employee is treated as having earned an extra income and the vehicle tax is collected through the payroll PAYE deduction system.

The present charge is 35% of the list price of the car if business use of the vehicle is less than 2,500 miles per year. The percentage is reduced to 25% where business mileage is between 2,500 miles and 18,000 miles per year or to 15% if business mileage is in excess of 18,000 miles per year. In addition, if the car will be four years old before 5 April, a reduction of 25% of the personal tax liability is made. Use of the car for driving to or from an employee's home to his normal place of work is classed as private use of the vehicle.

As an example, the table below shows the company vehicle tax payable by the employee for various business mileages for a vehicle whose list price, when new, was £20,000.

List price of car £20,000 40% tax payer 22% tax payer
Car registered new After 6/4/98 Before 6/4/98 After 6/4/98 Before 6/4/98
business miles p.a. <2,500

£2,800

£2,100

£1,540

£1,155

2,500< business miles p.a. <18,000

£2,000

£1,500

£1,100

£825

business miles p.a. >18,000

£1,200

£900

£660

£495

The company will pay 11.9% of the above amounts in Class 1A National Insurance contributions.

Tax charge from 6 April 2002

The tax charge for the company vehicle will be based on the carbon dioxide emission rating for the make and model driven by the employee. The lowest rate of tax for 2002/03 will be 15% of list price for petrol vehicles with emissions of 165g/Km but the emission rate minimum will be reduced to 155g/Km for 2003/04 and to 145g/Km for 2004/05. For every 5g above these limits, the percentage applied increases by 1% up to a maximum of 35%. Diesel vehicles have a 3% surcharge applied to the rates calculated but the maximum rate is capped at 35%. Thus for 2002/03 a car with an emissions rating of 179g/Km will give rise to a 17% tax charge for petrol-fuelled vehicles or 20% for diesel fuelled vehicles. These rates will increase to 19% and 22% in 2003/04 and to 21% and 24% in 2004/05.

Taking the same example as above but assuming a petrol-fuelled vehicle with an emission rating of 179g/Km gives the following personal taxes payable:

List price of car £20,000
petrol- fuelled vehicle emission rating 179g/Km
40% tax payer 22% tax payer
Tax payable 2002/03

£1,360

£748

Tax payable 2003/04

£1,520

£836

Tax payable 2004/05

£1,680

£924

It can be seen that high business mileage employees will pay more tax from April 2002 whereas lower business mileage employees and "perk" car drivers will benefit. It may be time to rethink the company policy on company cars for high mileage users.

Some employers are offering employees the facility to arrange private car leasing schemes using corporate rates negotiated with car leasing companies. Employees funding their own car could then charge their employers for business mileage on their expenses - from next year the maximum rate for tax purposes will be £0.40 per mile for the first 10,000 miles in a year and £0.25 per mile for additional miles. Mileage expense claims paid above this rate will be assessed as a taxable benefit on the employee but equally expenses reimbursed below this rate will make the employees eligible for tax relief on the difference.

The disadvantage of this method is that employees will have to keep good records of their business mileage and employers will be faced with more expense claims to be checked and processed. Because of this, some companies have decided simply to increase salaries to cover the employees' extra costs incurred in paying all their own motoring expenses including business motoring costs. This reduces the company workload but is difficult to introduce in a fair manner in many businesses. Also the employees will still need to maintain records of business trips in order to claim allowances in their annual tax returns.

However both employers and employees can benefit from these arrangements - the employers save on Class 1A National Insurance and employees may have a wider choice of vehicles than under the existing company policy.

In determining a new company car policy, the employer will need to be aware of vehicle emission ratings.These may be obtained from the manufacturers but they are also listed in http://www.comcar.co.uk, some of the magazines devoted to the fleet car business and at the Vehicle Certification Agency's web site.

Articles from previous newsletters

Acquisitions & Mergers | Big Brother | Business Plans | Climate Change Levy | Company Car Tax | Contracts of Employment | Corporate Immigration | Corporate Responsibility | Data Protection | Energy Audits | Environmental Liability | Euro Notes & Coins | Exports to Germany | Export procedures | Fraud recovery | Out of Court Offers | Payroll Review | Prevention of Fraud I | Prevention of Fraud II | Prevention of Fraud III | Product Liability | Redundancy | Stakeholder Pensions | Temporary Contracts | Travel Expenses | Value of the Euro | Work Permits | More articles |

Copyright © 2001 Commercial Angles