How do I work out whether a company car will cost more than cash alternative?
I’ve been offered a company car as part of my job or I can take a cash alternative and lease a car of my own.
If I choose the cash option, I need to pay for insurance, maintenance.
What I need to do is find out which option will cost me least – so, working on a car such as a VW Passat 2.0 se tdi 4 dr saloon with benefit in kind P11D value of £18,592 and emissions 159, what would be the monthly tax bill?
Thanks
September 8th, 2010 at 8:01 am
18592 * (15+ (160-140)/5)% = £3532 per year, every year, is what they will be paying you as a benefit for the car. You will not pay tax directly on it but it will lower your tax free allowance by this amount for the subsequent tax years
If your salary before the car is less than 34000 the tax due will be approx (3532 * 0.33) = £1165.56 that would be split evenly each month as approx £97.
If your salary is 38000 or above before the car benefit then tax on that is approx (3532 * 0.41) = £1448.12 a year.
Don’t think of it in terms of tax because if they increase your salary/give you a lump sum you will also pay tax. You need the salary increase less maintenance and insurance and compare to the car benefit and look at useful life of the car etc etc. you need some more figures for me to play with.
September 8th, 2010 at 8:48 am
As agius says, the cash equivalent of a Passat is £3532 – this is what you would pay tax on.
What you need to do is work out how much it would cost you to lease a similar car per annum and deduct your business use. Has your company told you what lump sum they would pay you? Without knowing that, it’s hard to work out what is best!
You need to compare the two cash amounts as tax will be charged at your highest rate on either the car benefit (£3532) or the lump sum less business miles.
September 8th, 2010 at 9:13 am
The CO2 value of 159 is rounded down to the next multiple of 5, ie. to 155. For the tax year 2007/8 that gives an appropriate percentage of 18%. However, assuming the car was not registered before 1 January 2006, there is a 3% supplement for diesel cars. Therefore the actual percentage that will be applied to the list price is 21%.
So, the benefit for 2007/8 would be £18,592 x 21% = £3,904. This would be apportioned if the car is not available for the whole year. You would pay tax on the benefit as though you had earned that amount in extra salary. Note that you only pay TAX on the benefit – not employee’s national insurance as agius thought. The amount of tax you pay would depend on your personal circumstances but is likely to be £859 (at 22%) or £1,562 (at 40%) for a full year.
You need to compare:
1. that tax charge, and
2. the cost of leasing and maintaining your own car partly offset by the value of the cash alternative (which will be subject to tax and national insurance).
You might also like to note that for the tax year 2008/9 the appropriate percentage for calculating the benefit will increase to 22%. Therefore the benefit figure will be £4,090. On the other hand, the basic rate of tax will fall to 20% so you might actually pay less tax on the benefit next year.