Employees who contribute to the cost of using their company car for personal journeys get a reduced tax charge. This can be calculated in two ways. As the employer which one offers you the greatest advantage?
Company car contributions
As you know, cars provided to employees for work purposes which are also available for private journeys count as a taxable benefit in kind (BiK). Because HMRC’s rules make it extremely difficult to avoid the BiK most employers don’t bother trying. They allow private use of the car as a perk, but some ask their employees to contribute to the extra costs this involves. A side effect is that the taxable BiK is reduced. This is also good news for the employer.
A lower BiK means that the employers’ NI payable at 13.8% is correspondingly less. For example, if the BiK is reduced by £1,000 per car and you have, say, ten company cars, you’ll save £1,380 per year.
Car benefit calculation
The BiK is worked out using a combination of the vehicle’s list price and its CO2emissions. For example, if a car’s emissions are 195g/km, this results in BiK equal to 34% of its list price. If that’s £25,000, the BiK is £8,500 (£25,000 x 34%) per year. A contribution from the employee that reduces this can take two forms: a lump sum or a regular, usually monthly, payment.
Where the employee pays a lump sum to an employer, it’s knocked off the list price of the car when working out the BiK. The maximum that the list price can be reduced by is £5,000, so to be tax and NI efficient the contribution shouldn’t exceed this. In the example given above a £5,000 contribution will reduce the annual BiK by £1,700 (£5,000 x 34%) meaning you’ll save £235 in employers’ NI (£1,700 x 13.8%).
Note. You’ll also be better off because you’ll have £5,000 more in the bank. However, when the car is sold it’s usual to return a proportionate part of this to the employee. Say you sold the car for 65% less than you paid for it, you would return the £5,000 less 65%, i.e. £1,750, meaning the employee’s net contribution is £3,250.
To emulate the lump sum contribution of £3,250, you need to project how long you intend to keep the car and then spread the payment accordingly. Over fours years it’s £67.70 per month. This is knocked off the BiK after the other calculations. So in our example the annual charge of £8,500 is reduced by £812 per year (£67.70 x 12), thus reducing the employers’ NI by £112. That’s only half the saving of the lump sum contribution and it only trickles in over four years.
We’ve used a high CO2 emitting car for our example to make the comparison on contribution methods clear. But the NI saving from lump sum contributions is less for lower CO2 emitting cars (roughly 104g/km or less). The advantage is also reduced if the contributions exceed £5,000. Always crunch the numbers before deciding which contribution method to use (see The next step ).
A lump sum contribution towards the cost of the car provides the greatest financial advantage for high CO2 emitting vehicles. Conversely, contributions towards the running expenses are usually more tax efficient for cars with CO2 emissions of 104g/km or less. Use our calculator to work out the numbers more precisely.