A few clients have asked me recently to look at the tax relief on business cars. Aside from running through the standard rules, it got me thinking about the most tax-efficient cars.
Now, you might think that this makes me a typical boring accountant – putting tax savings ahead of speed. However, you might be surprised to find that the most tax-efficient car I looked at is also the fastest to accelerate to 60mph. Read on to find out the rules…..and which car won the race.
How do you claim tax relief on a business car?
The standard rule for cars is that you can claim an expense each year called a writing down allowance (WDA). This is claimed as a percentage of the cost of the car.
The WDA depends on the CO2 emissions of the car. If these are over 75g/km, the rate is 18%. Over 130g/km and the rate is 8%.
Bruce’s Ltd Co buys a car for £20,000. The CO2 emissions are 150g/km.
The Ltd Co can claim tax relief on £20,000 @ 8% = £1,600. At the Corporation Tax rate of 20%, this reduces the Ltd Co’s tax bill by £320.
What cars get additional tax relief?
If your business buys a low (or zero) emission car, you can claim the full cost of the car as an expense in the year that it’s bought.
To qualify, the care must have CO2 emissions of 75g/km or less, and must be a new car. (Second hand cars use the standard rules above.)
Until 31 March 2018, new cars that meet this emissions test will qualify for a 100% first year allowance. This provides immediate write off against profits.
Kirsten runs a Ltd Co and buys a car for use by an employee. She chooses a new car with CO2 emissions of 70g/km. The car costs £20,000 and Kirsten buys it in April 2016. The Ltd Co has an accounting year-end of 30 June 2016.
In calculating the taxable profits for the year to 30 June 2016, Kirsten’s company can claim a 100% allowance of £20,000 for the cost of the car.
This reduces the company’s tax bill by £4,000, ie Kirsten’s company saves £3,680 in tax compared to Bruce’s company on a car of the same price.
Choosing a low emission car will also keep the benefit in kind charge low. In the above example, Bruce’s employee would be taxed based on 27% of the list price, whereas Kirsten’s employee would be taxed on 7% of the list price.
There is a lot to think about with company cars for both the business owner and employee. It’s always worth asking your accountant before you buy a business car.
And what was the most tax-efficient car? Well, the Tesla Model S ticks all the boxes and leads to the lowest tax bill for Company and Employee…….while doing 0-60mph in 2.8 seconds! So low tax cars don’t have to be boring.
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Added by Jon Davies
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