Money Matters - Winter 2009

The road ahead for car benefits

Photo of car A dramatic rise in the tax charge on company cars at the luxury end of the market is in store for some high-earning directors and employees from 6 April 2011.

The main change is the removal of the £80,000 price cap. The car benefit is calculated by applying a percentage to the car’s list price. This percentage depends on the car’s CO2 emissions figure, and ranges from 15% to 35%. However, the maximum list price for this at present is £80,000. This means that the highest annual car benefit an employee or director could face in a year is currently £80,000 x 35% = £28,000. At a top rate of tax of 40%, this results in income tax of £11,200.

From the 2011/12 tax year, the price cap will be removed and the actual list price will be used to calculate the benefit. When you consider that the top rate of income tax will then be 50% for individuals with taxable income of more than £150,000, the resulting effect will in some cases be quite startling. For example, a director earning well in excess of £150,000 and driving a car costing £140,000 will be paying tax of £11,200 this year (2009/10), £14,000 next year (2010/11) but £24,500 in 2011/12.

Other changes include lowering the emissions bands to which each ‘appropriate percentage’ applies by 5g/km next year and another 5g/km in 2011/12. The effect for most drivers will be to increase the percentage used by 1% in both years. For the majority of directors and employees, who have cars below £80,000 in value and earn less than £150,000, the change will not be so dramatic. For example, for a £20,000 car it would mean an extra £80 of tax for 2010/11 and another £80 the following year.

Whereas this is relatively insignificant, the cumulative effect of the changes is further to increase the tax burden on company cars, both for employees and employers through increased national insurance contributions. Nor is any government likely to lighten it in the foreseeable future. Now may be the time to look again at alternative ways of rewarding employees, such as paying the comparatively generous maximum tax-free mileage allowances to employees making use of their own cars on business, or perhaps a salary-sacrifice scheme, or a ‘pick and choose’ menu of different benefits with varying costs.