Company Car

[drmouse]

Hi all

I am new to contracting, currently in my second month of my first contract. One of the things I want to do is get myself a decent car, once I have the money available.

Initially, I discounted the option of getting a company car. Most of the guides said that the only way for it to be worth it was to get a car with ultra low emissions (<50g/km CO2), and all these that I had seen were... not my kind of car. I like something fun to drive .

However, one thing has made me look again: The BMW 330e. It seems to be just about as fun to drive as I want, so I want to run the numbers to see whether leasing the car through the company is worth it. However, I'm not 100% on how the taxation works. I understand the BIK rates, it's where within my income the BIK would sit which I am unsure of.

I currently take £8060 salary, and a chunk of dividends to take me up to the higher rate threshold. The rest is kept as retained profit in the company (at the moment).

Looking into the company car rules, there are 2 ways I can see it being calculated which affect the numbers.
1) It is counted as part of my salary, before I take dividends. Therefore, I could reduce my salary by the BIK amount, and then either keep dividends the same (reducing my overall income but keeping below the higher rate threshold) or increase the dividends to make up for the reduced income (paying higher rate dividend tax on the extra).
2) It is top loaded, so the BIK would be taxed and NI'ed at either basic rate (if I reduced dividends/salary) or higher rate (if I didn't).

It's possible that there would be a completely different calculation, too, but these seem the most logical 2 options.

My question, therefore, is "How does the tax calculation work for company cars?"

Is it option 1, option 2, or something different? Armed with this info, I can work out whether it is worth it compared to my other options.

Thanks very much,
Mouse

[ContrataxLtd]

Hi all

I am new to contracting, currently in my second month of my first contract. One of the things I want to do is get myself a decent car, once I have the money available.

Initially, I discounted the option of getting a company car. Most of the guides said that the only way for it to be worth it was to get a car with ultra low emissions (<50g/km CO2), and all these that I had seen were... not my kind of car. I like something fun to drive .

However, one thing has made me look again: The BMW 330e. It seems to be just about as fun to drive as I want, so I want to run the numbers to see whether leasing the car through the company is worth it. However, I'm not 100% on how the taxation works. I understand the BIK rates, it's where within my income the BIK would sit which I am unsure of.

I currently take £8060 salary, and a chunk of dividends to take me up to the higher rate threshold. The rest is kept as retained profit in the company (at the moment).

Looking into the company car rules, there are 2 ways I can see it being calculated which affect the numbers.
1) It is counted as part of my salary, before I take dividends. Therefore, I could reduce my salary by the BIK amount, and then either keep dividends the same (reducing my overall income but keeping below the higher rate threshold) or increase the dividends to make up for the reduced income (paying higher rate dividend tax on the extra).
2) It is top loaded, so the BIK would be taxed and NI'ed at either basic rate (if I reduced dividends/salary) or higher rate (if I didn't).

It's possible that there would be a completely different calculation, too, but these seem the most logical 2 options.

My question, therefore, is "How does the tax calculation work for company cars?"

Is it option 1, option 2, or something different? Armed with this info, I can work out whether it is worth it compared to my other options.

Thanks very much,
Mouse

Hi Mouse

This is definitely one to speak to your accountant about (I sound like NLUK!) as you need to appreciate whether or not it is worth putting the Co Car through your business and if it is whether to lease or buy.

Just to clarify a couple of the points though, the BIK is probably about £3k - £3.5k (using a quick google of the cars details so could be wrong) and this is pretty much taxed as if it was salary from a personal tax point of view i.e. if gets added onto your employed income in your tax computation.

If you are on £8,060 you may not need to reduce your salary much to keep this from being taxed i.e. in within your personal allowance.

Remember, if you are on the flat rate scheme then normally no VAT is reclaimable (lease or buy) and you can only reclaim 50% of the VAT on a lease if you are on the standard scheme with no VAT being reclaimable on a purchase under normal circumstances.

Martin
Contratax Ltd

[drmouse]

Hi Mouse

This is definitely one to speak to your accountant about (I sound like NLUK!) as you need to appreciate whether or not it is worth putting the Co Car through your business and if it is whether to lease or buy.

Just to clarify a couple of the points though, the BIK is probably about £3k - £3.5k (using a quick google of the cars details so could be wrong) and this is pretty much taxed as if it was salary from a personal tax point of view i.e. if gets added onto your employed income in your tax computation.

If you are on £8,060 you may not need to reduce your salary much to keep this from being taxed i.e. in within your personal allowance.

Remember, if you are on the flat rate scheme then normally no VAT is reclaimable (lease or buy) and you can only reclaim 50% of the VAT on a lease if you are on the standard scheme with no VAT being reclaimable on a purchase under normal circumstances.

Martin
Contratax Ltd

Thanks Martin

While I definitely plan to speak to my accountant before going ahead, I just wanted to run some numbers first to check whether it's in the right ballpark to be worth it, comparing it with my other options.

AFAIK if I take more than £8060 I need to pay NI, and the BIK would be included in this. Year 1 BIK would be approx £2500, so I could reduce my salary by £2500 and still pay no tax or NI on this. I could then choose to make up the lost earnings by taking a larger dividend, or take the hit. If I understand correctly, if I didn't reduce my salary I'd have to pay both employers and employees NICs on the BIK.

However, most of the guides out there say you pay tax on BIK at your highest rate. This seems to be a restatement of "it counts as salary" but, for a contractor this is very different. For me, it would mean paying 20%+NICs on the BIK if I reduced my earnings to compensate, or 40%+NICs if I didn't. This makes a huge difference when calculating whether it's worth it.

[northernladuk]

Company cars to date haven't been a good idea hence the fact non of us has them. We've had plenty of threads which I've linked below. I'm sure quite few of them go in to the figures so that might help. If you went for the eco cars it got close but historically there haven't been many very good low emission cars but this is changing rapidly.

They may become more worthwhile with the divi tax and other changes but I've yet to see anyone test it so will be interesting.

Here are the links.

https://www.google.co.uk/search?q=co...NueCgAa7-brwDA

Maybe worth doing as much homework as possible because I bet your accountant won't know and have to go look in to it as well. It's not something that's standard for contractors so they won't be on top of it like other aspects that affects us directly.

I'd also be interested to know, when we talk about it being efficient, if the fact we can't shut the company down any more (if there is a proper reason to do so of course) means many people will go over the threshold when it does come to extracting the money makes a difference. Did accountants always take this in to account or did they assume we'd close the company and extra profits at a more preferential rate.

Anyway.. @ the OP, on a side note. Your focus should be 100% on getting your warchest up, not spunking your money on cars. IMO you should be extracting enough just to live and the rest building the war chest up. When it's covers at the very least 3-6 months living, then you can start looking at what to spend it on. No point having a flash car and then losing it because you can't get a second gig etc.

[ContrataxLtd]

Thanks Martin

While I definitely plan to speak to my accountant before going ahead, I just wanted to run some numbers first to check whether it's in the right ballpark to be worth it, comparing it with my other options.

AFAIK if I take more than £8060 I need to pay NI, and the BIK would be included in this. Year 1 BIK would be approx £2500, so I could reduce my salary by £2500 and still pay no tax or NI on this. I could then choose to make up the lost earnings by taking a larger dividend, or take the hit. If I understand correctly, if I didn't reduce my salary I'd have to pay both employers and employees NICs on the BIK.

However, most of the guides out there say you pay tax on BIK at your highest rate. This seems to be a restatement of "it counts as salary" but, for a contractor this is very different. For me, it would mean paying 20%+NICs on the BIK if I reduced my earnings to compensate, or 40%+NICs if I didn't. This makes a huge difference when calculating whether it's worth it.

Hi Mouse

The car BIK is looked at separately for NIC purposes so a salary of £8,060 and then a BIK of £2,500 won't include any employees NI. The BIK will however incur class 1A NIC at the rate of 13.8% on the BIK itself (no reducing your salary will change this).

To clarify the tax position on the BIK, you have a personal allowance of £11,000 for 2016/17, your salary uses up £8,060 of this so you are left with £2,940. If the BIK is only £2,500 then this is covered by your personal allowance so no tax to pay either (it is always taxed before the dividends). If for example your salary was £15,000 then the BIK would be taxed at 20% as this is your marginal rate of tax for employment income i.e. salary + BIK together.

NLUK - I'd say all contractor accountants should be able to advise on, and do the necessary calculations surrounding company cars. Yes there are a lot of factors to consider but nothing really out of the ordinary.

Martin
Contratax Ltd

[northernladuk]

NLUK - I'd say all contractor accountants should be able to advise on, and do the necessary calculations surrounding company cars. Yes there are a lot of factors to consider but nothing really out of the ordinary.

Martin
Contratax Ltd

Interesting. I asked SJD and they the guy I had said he'd have to look in to it for me rather than just have it on the tip of his tongue like most other topics. I did have a model in mind as well so maybe the time he wanted was to crunch the actual numbers. I would have though so few contractors having cars it wouldn't be unreasonable for them to go back and check up before giving the info. Thanks for that though.

Also maybe my view is skewed as I also asked the one man band I had before SJD and he never got back to me, but then he never did on anything until it was too late so maybe I'm lumping the two issues together.

[ContrataxLtd]

Interesting. I asked SJD and they the guy I had said he'd have to look in to it for me rather than just have it on the tip of his tongue like most other topics. I did have a model in mind as well so maybe the time he wanted was to crunch the actual numbers. I would have though so few contractors having cars it wouldn't be unreasonable for them to go back and check up before giving the info. Thanks for that though.

Also maybe my view is skewed as I also asked the one man band I had before SJD and he never got back to me, but then he never did on anything until it was too late so maybe I'm lumping the two issues together.

I'd expect any accountant to be able to discuss the implications of a company car with you without needing to research it first, however, the actual calculations would need a bit of time to do to ensure all factors relating to your specific situation are covered so this is probably what the guy from SJD was doing.

[drmouse]

The car BIK is looked at separately for NIC purposes so a salary of £8,060 and then a BIK of £2,500 won't include any employees NI. The BIK will however incur class 1A NIC at the rate of 13.8% on the BIK itself (no reducing your salary will change this).

To clarify the tax position on the BIK, you have a personal allowance of £11,000 for 2016/17, your salary uses up £8,060 of this so you are left with £2,940. If the BIK is only £2,500 then this is covered by your personal allowance so no tax to pay either (it is always taxed before the dividends). If for example your salary was £15,000 then the BIK would be taxed at 20% as this is your marginal rate of tax for employment income i.e. salary + BIK together.

Thanks for that. Perfect.

I'm a very mathsy person, and I've found the best way for me to understand whether something is a good idea is to go through them myself. If someone else does the work, it doesn't go in as well. So I plan to crunch the numbers on all my options and see what turns out best overall.

I suspect I'll still be better off getting a second hand diesel privately than leasing a brand new BMW, but without the numbers it's just a gut feeling.

Thanks very much for your help
Mouse

[ContrataxLtd]

Thanks for that. Perfect.

I'm a very mathsy person, and I've found the best way for me to understand whether something is a good idea is to go through them myself. If someone else does the work, it doesn't go in as well. So I plan to crunch the numbers on all my options and see what turns out best overall.

I suspect I'll still be better off getting a second hand diesel privately than leasing a brand new BMW, but without the numbers it's just a gut feeling.

Thanks very much for your help
Mouse

No problem Mouse, give me a shout if you need any more help with this.

[northernladuk]

I'm a very mathsy person, and I've found the best way for me to understand whether something is a good idea is to go through them myself.

Good way to be. Not gonna get caught out that way.