Company cars – what contribution should I make for tax efficiency?

There are three ways to reduce the tax payable on your company car. Contribute to the cost of the car; contribute to the running expenses; or combine the two. But which one will result in you paying less tax and national insurance?

Well, that really depends…

Taxable benefit-in-kind (BiK) calculations for company cars used to be pretty straightforward. However, now things like CO2 emissions and fuel consumption have to be considered when deciding on the correct rate to apply to your particular company vehicle. This is made even more complicated by the contribution method chosen by the car driver.

Both methods reduce the amount of the BiK on which tax and national insurance is paid. However, the tax man treats both contributions differently when doing his BiK calculation, which can result in a very different tax and national insurance bill.

This means that there’s no ‘one size fits all’ answer, which is why we’ve put together our comparison calculator to let you fiddle around and decide on the method that best suits your particular circumstances.

A few things to think about

We’ve also pulled together a few tips for each of the methods to help you understand why a particular method is best for the type of company car your have.

Consider a capital contribution if:

• the vehicle has CO2 emissions above 124g/km and/or slow depreciation.

If your car is a slow depreciator then a capital contribution makes sense. This is because on changing your company car you’ll be entitled to some of your capital back. Something to bear in mind is that the less the car depreciates the more you’ll get back.

WARNING: be careful with the amount capital contribution that you make as anything over £5,000 won’t reduce your BiK.

Consider running cost contributions if:

• the vehicle has CO2 emissions below 124g/km and/or high depreciation

There’s no benefit-in-kind cap on running cost contributions. This means that you can reduce your annual BiK to nil by making a running cost contribution equal to the cost of the car e.g. your car cost £7,000, so you can make a running cost contribution of the same amount to reduce the BiK to nil. However, the BiK will only reduce if your company has a policy in place that requires an actual payment to be made. This rule doesn’t apply to capital contributions.

Combining the two methods

You can also combine the contribution methods to maximise your tax and NI position. So, if you wanted to make a capital contribution up to the £5,000 cap and also make a running cost contribution towards the same vehicle then it is acceptable to do so.

What next?

Make, model, fuel performance and emissions relating to the car are all very important factors when deciding on the vehicle that will give you the best tax and national insurance efficiency. Have a play around with our calculator and get in touch if you’d like to discuss your own situation in more detail.

To discuss this post contact Stephen Usher on 0141 418 6550 or stephen.usher@keypp.co.uk

– See more at: http://www.keypp.co.uk/company-cars-contributions-tax-efficiency/#sthash.0kMSW4iy.dpuf

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“Mr Usher has been responsible for organising my personal and LTD company tax returns for the last 3 years. He is efficient, organised and punctual in his work and can finalise the required work in good time. He is up-to-date and has the knowledge to do a perfect job. In addition, he is very nice and always available to give advice and information when needed!”

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