What is the advantage for the employer?

Low emission cars currently attract 100% first year capital allowances and this will continue to apply when the new capital allowances regime commences in April 2009. So effectively, you get tax relief for the full gross cost of the car in the year of acquisition.

What is the advantage for the employee?

The system of calculating the Benefit in Kind (BIK) for company cars by reference to a % of the list price dependent on the level of emissions is now well established. The percentage levels at the the upper and lower end of the table, with corresponding adjustments running throughout, to maintain the pressure to choose lower emission cars.

From April 2008, new tax breaks are available to employees who have company cars with CO2 emissions of 120 g/km or less. The BIK chargeable on these cars is reduced to 10% of the list price for petrol cars and 13% for diesel cars. For example, a diesel car costing £10,000 generates a car scale benefit of £1,300. For a 20% basic rate taxpayer, this equates to a tax cost of £21.66 per month, £260 in a full tax year. The corresponding Class 1A National Insurance employer's cost in a full year is £166.40

Aren't all the low emission vehicles poor and unreliable?

No! The range of low emission cars that meet the requirements now includes prestige manufacturers such as Audi and BMW as well as a range of estates, hatchbacks and saloons from the likes of Ford, Renault, VW and so on.

The choice is increasing year on year and this trend should continue in line with the clear tax advantages available to employers and employees. Details of vehicles with 120g/km or less can be found at www.vcacarfueldata.org.uk

Can salary sacrifice be used to reduce the cost?

You can offer low emission cars to employees in return for salary sacrifice. For example, if it costs an employee £200 per month to maintain and insure a car, excluding fuel, this cost is funded from net salary.

If this is funded from gross salary via salary sacrifice, the net cost to the employee after tax (20%) and national insurance (11%) is £138 plus the car scale charge based on a £10,000 list price of £21.66, giving a total cost of £159.66. The employee saving is just over £40 per month.

There is no cost to the employer as the full cost is being met by the employee via salary sacrifice. Other employer savings might be available including national insurance and VAT on the cost of the car.

And what happens with business mileage?

Finally, we turn to business mileage allowances available and, whilst the advisory fuel rates for company cars have been increased from 1 June 2008, there has, as yet, been no increase in the employee provided car rate of 40p per mile for the first 10,000 business miles and 25p per mile for all additional business miles.

Although these rates are mandatory and cannot be exceeded without generating additional employer/employee income tax and national insurance liabilities, employers can pay less than these amounts.

Where the employer pays less than the maximum permitted, the employee can claim tax relief on the difference.

For example, an employer pays 30p per mile for the first 10,000 business miles. An employee claiming 7,500 business miles for the use of his/her own car in 2008/09 would be paid 7,500 @ 30p = £2,250 by their employer. The same employee can then claim tax relief of 7,500 @ 10p = £750.

This relief, subject to a claim to HM Revenue & Customs, is then effectively given at the rate of tax appropriate to the employee: a 2008/09 basic rate taxpayer should receive a repayment of £750 @ 20% = £150.

This claim can be applied for retrospectively. Providing the employee makes a claim by 31/1/09, they can claim for business mileage incurred back as far as the tax year ended 5/4/03.

Contact John Dixon, Elaine McKay or Ruth Jacobs on 0114 2802930.

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