Company cars are only going to make financial sense in the coming years if they’re very low or zero-rated on CO2 emissions, writes Jen Lawton. Personal car allowances and personal contract hire may be the way forward.

It’s true to say that the company car was a nice perk in the past, but as benefit calculations have become more and more aggressive over time, its attractiveness started to wane.

Regardless of the amount you actually pay, it’s the new vehicle list price, inclusive of optional extras, that is important for tax purposes.  In addition, the CO2 emissions, fuel type and HMRC benefit multiplier are required to calculate the value of the car benefit in kind.   For diesel vehicles, there is an additional 3% added to the benefit multiplier percentage.

So the calculation is then pretty straightforward as shown below:

Car List price HMRC Company car taxable benefit for the year ended…
  Including  extras benefit multiplier 5 April 2016 5 April 2017 5 April 2018 5 April 2019 5 April 2020
  £ % £ £ £ £ £
Ford Focus 18,000 21 3,780
(Diesel) 23 4,140
25 4,500
27 4,860
30 5,400
Value of car benefit in kind 3,780 4,140 4,500 4,860 5,400
Tax due on car benefit 20% 756 828 900 972 1,080
Tax due on car benefit 40% 1,512 1,656 1,800 1,944 2,160
Annual increase in tax payable 9.5% 8.7% 8.0% 11.1%

The problem is that the HMRC benefit multiplier is set to increase quite dramatically in the coming years, which may pose challenges for businesses and their employees. (The ostensible justification for the rises is the green agenda of reducing polluting vehicles, but we are already in the position where fully electric cars are being taxed, so there’s some room for debate over the true motivations.)

A company that contract hires its fleet may well be locked into an arrangement they can’t escape, which will leave workers out of pocket. In 2016-17, the tax due at basic rate on our Ford Focus would be £828. And it keeps rising year-on-year until 2019-20, when it reaches £1,080. Higher-rate tax payers would find themselves shelling out £2,160.

It seems likely that many businesses may choose to move to a car allowance instead, encouraging their staff to buy or hire a vehicle themselves – perhaps with an instruction that it needs to be less than five years old for the sake of reliability and appearance. Personal contract hire is now easier than ever. Big deposits are no longer required and it’s possible to pick up a car for a competitive price per month, particularly where the user has low annual mileage.

It’s worth bearing in mind that the figures in the table above completely exclude fuel. You have an additional calculation to make if an employee is getting free petrol or diesel.

The long and the short of it is that things are getting tougher and traditional company car arrangements are becoming progressively less attractive. It may be time for you to think ahead.