Imagine you
are in the market for a new company car. What drives your decision? What are
the key factors you are looking for? Is it about the cost, the performance, the
image, the reliability? In an ideal world cost would not be an issue, but in
current economic times cost is the key factor in most decisions.
If you buy a
new car for your business that has CO2 emissions of 95g/km driven, or is
electric, you can qualify for a 100 per cent first-year capital allowance (FYA).
This allows you to offset the whole cost of the investment against taxable
profits in the year you make the purchase until 31st March 2015,
saving you tax and helping the environment at the same time.
Over 1
million company cars are purchased each year, making up half the UK car market,
with those vehicles that qualify for 100% FYA making up around 5% of this
figure. As such, the potential tax savings are immense.
Now you may
be thinking that this only really applies to electric or hybrid cars, but it
does in fact cover a large range of ‘normal’ cars.
Manufacturers
have been working hard since the rules were introduced to reduce the emissions
of their vehicles to make them more attractive to business users, and there are
now a wide range of cars available that meet the criteria, which is ever
increasing.
These range
from the budget models from Kia and Hyundai, to mid-range vehicles such as the
Ford Focus and the Renault Megane, but do not yet stretch to the higher-end
manufacturers. Under the old rules there were offerings from BMW and Audi, and
it is expected that there will be new models available soon in order to appeal
to this market.
So, let us
have an example of the potential tax savings:
If you
compare the capital allowances available to you on the Ford Focus 1.6 TDCI Econetic,
with a similar petrol version, there is quite a large saving to be had.
Both
vehicles can be purchased for around £20,000. If the petrol version was
purchased, only 8% of the cost could be offset against taxable profits,
reducing the tax by £320. In contrast with the eco version a company can claim
the full purchase cost against its taxable profits, reducing the tax charge by
some £4,000.
If you take
this example and apply it to a sole trader, making a good level of profits, and
paying tax at 40%, then this doubles up to £8,000 versus £640. And when applied
to additional rate tax payers, and those in the marginal, 60 – odd % band, the
savings stack up even more.
|
Tax rate
|
Potential tax saving
|
|
20%
|
£4,000
|
|
40%
|
£8,000
|
|
45%
|
£9,000
|
|
60%
|
£12,000
|
There is
also scope for using this at the lower-end of profits, and it being more
beneficial. If you are claiming tax credits, paying around £100 per week for
childcare, making a profit of around £20,000, you may be entitled to around
£2,500 per year in tax credits. But if you purchased a low emission car for
your business, and claimed the 100% FYA, you could be entitled to around £8,500
in tax credits.
The extra £6,000 would more than cover the monthly repayments
on your new car!
I think you
will agree that when it comes to buying a company car there is a lot to
consider, and there are considerable tax advantages to making the right
decision.
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