The end of the road for the company car?
With the ever-increasing benefit costs for company cars for both the employee and the employer, and the new rules for Optional Remuneration Arrangements (OpRA), is a company car as cost-effective as it once was?
I recently started the journey of choosing a new company car. I have always been sensible when choosing a company car, considering both the impact on my wallet and the environment, while ensuring the car was going to be suitable for family and long journeys for work every few weeks.
The first company car I choose in 2010 was a £20,000 low emission diesel. With CO2 emissions of only 119 g/km this attracted an appropriate percentage for car benefit charge of 13%, costing £43 (basic rate) or £86 (higher rate) in tax a month. Over the past seven years, engine technology has not kept pace with the increase in company car taxation. Choosing the closest equivalent today with CO2 emissions of only 99 g/km means that from April 2018 the tax cost will be £73 (basic rate) or £146 (higher rate) per month, a 70% increase. In fact, from April 2018 the lowest appropriate percentage will be 13% achievable only by cars with CO2 emissions of less 50 g/km.
If, unlike myself, you are a petrol-head, a new £30,000 Golf GTI with CO2 emissions of 145 g/km will end up costing from April 2018 £150 (basic rate) or £300 (higher rate) in tax alone per month. Add a fuel car and this will cost over £260 or £520 a month.
Optional Remuneration Arrangement (OpRA)
My situation was complicated even further by the fact that my contract offers a choice of company car or cash allowance. Under the rules introduced in April 2017 this is now a type B OpRA. This creates a charge to tax and class 1A National Insurance on the higher of the:
- car allowance value;
- benefit in kind value.
Having these arrangements means that choosing a low emission car may no longer be of benefit as tax will be based on the value of the cash allowance if this is greater than the car benefit in kind value.
In addition to potential tax savings there are other advantages to taking the cash allowance. If the amount your employer pays in mileage allowance is less than the approved amount, you can claim Mileage Allowance Relief on the difference. This can be significant depending on the amount paid by the employer and the amount of business mileage.
Making an informed decision
Before deciding whether to take a car allowance or a company car you must undertake some simple steps to compare the costs:
- Decide on the car you want - this helps to ensure that the comparison is fair.
- Review your business and personal mileage and include cost of fuel in your calculation.
- Calculate the total cost of a company car including the tax payable and cost of fuel.
- Calculate the cost of buying your own car.
- Calculate your net car allowance reducing by tax and NI that will be deducted.
- Shop around to understand the price of purchasing. For new cars there are numerous websites available where dealerships bid for your business.
- If you are going to buy a car outright for calculation purposes spread the cost over how long you will keep and deduct the value of the car at the end of that period.
- If you cannot afford to buy then review the options for bank loan, Hire Purchase (HP), Personal Contract Purchase (PCP) or Personal Contract Hire (PCH).
- Include costs for insurance, tax, servicing, tyres, etc.
Include tax reclaim for Mileage Allowance Relief if appropriate
I have always been an advocate of company cars over a car allowance for the peace of mind for the employee and the employer. However, after going through this process and understanding the scale of the savings that can be made the choice of moving to a car allowance was a simple one.
As an employer
If, as an employer, you do not offer a car allowance then it may be worth reviewing your company car scheme to understand the cost in Class 1A National Insurance. It may be more cost effective for you and your employees to offer an allowance.
Remember that the same duty of care applies to private vehicles used for work as company provided vehicles and therefore any employer looking to move to car allowance should ensure that they have correct policies and checks in place to ensure that these are met.