Money Matters - Autumn 2008

Driving down the costs of company cars

With the rising cost of car fuel, any way of saving on motoring costs is welcome. One way of doing this is to make use of the generous tax reliefs available on environmentally friendly cars. Fortunately, there is a growing range of cars with carbon dioxide (CO2) emissions low enough to qualify for tax benefits.

If your business is buying a car, choose a new car with CO2 emissions of 110g/km or less. That will enable you to write off the whole cost against tax in the year of purchase by claiming a 100% first-year capital allowance. For cars with higher emissions, and all used cars, tax relief is limited to a writing down allowance of 20% of the cost, with an upper limit of £3,000 where the car costs more than £15,000. Cars do not qualify for the new annual investment allowance, which gives immediate tax relief on up to £50,000 a year of expenditure on equipment.

From April 2009, the writing down allowance is expected to go down to 10% on cars with CO2 emissions above 160g/km. This means it will take much longer for a business to receive tax relief on a more polluting car.

Directors and employees can be taxed heavily on the benefit of a company car, but much less so on a low emission model. Since April 2008, an employee who drives a petrol-fuelled car with CO2 emissions of 120g/km or less is taxed on only 10% of the list price. For a diesel car, tax is charged on 13% of the list price. These lower percentages can make a low emission company car a worthwhile benefit for an employee compared to the cost of owning a car personally. However, it is still worth making a detailed calculation of costs and benefits for the employee and the business, because there are so many variables to consider with company cars. We can help you with this.

You will also pay little or no vehicle excise duty on cars with CO2 emissions up to 120g/km. Up to 100g/km, car tax is nil; and with 101–120g/km the tax is currently £35. On top of all these tax savings, running environmentally friendly cars will also boost your business’s green credentials.