Whether you’re a business owner or are an employee, you may come across the idea of a company car. This can be a nice perk to any job, but it comes with its own set of costs and responsibilities; both for the employee who drives it as well as for the employer who must pay for it. From a tax standpoint, company cars qualify as a form of benefit and are treated as extra salary. The tax office will calculate a cash equivalent of the use of a company car, and then add this to the regular salary where it will become subject to income tax. There may be additional expenses associated with company cars, including insurance and fuel. With this in mind, when is a company car worth the cost?
Costs vs. Benefit to Employers
Providing a company car for employees is more than just a nice gesture; it can be deducted as a business expense. It’s helpful to choose cars which are more environmentally friendly, as this may impact the amount of tax you pay. The rates will depend on the country, but if you’re comparing Ford or Opel models at Carsales for your fleet, be sure to take a look at fuel consumption and CO2 emissions to minimise your tax bill. However, you may be responsible for paying not only the cost of the car itself, but also the running costs and insurance bill. There is also a company car tax on top of this. Be sure to have your accountant go over the numbers carefully to determine whether or not a company car benefit makes sense for your business, or whether a cash benefit would be more feasible.
Cost vs. Benefit to Employees
Receiving a company car is a huge benefit for many employees, particularly if running costs and insurance are also covered. If you don’t use your car for any purpose other than driving to and from work, this can prevent the need to purchase a car of your own. However, as mentioned above you will be liable for paying income tax on this type of benefit. Employees should remember that they can deduct the running costs of a company car, helping to offset the extra income that it represents. However, if your employer covers the cost of fuel, this will also qualify as a taxable benefit. The percentage you must pay will depend on where you live and your income tax bracket, but it can be as high as 40%. For example, in the UK the car benefit charge is based on the car’s list price, the carbon dioxide emissions, its fuel type, and the amount that you pay towards the car.
The Verdict
At first glance, driving a company car may seem like an agreeable benefit for both employer and employee. Yet the tax rates and running costs may be overwhelming, so it’s best to look at all the facts in your particular situation before committing to anything. In some cases, a cash allowance will offer a more favourable taxation rate, which could be a better transportation solution.