One increasingly tax efficient benefit for an owner managed business is an electric car. Since April 2020, this ‘perk’ has become even more tax efficient and well worth considering if you are changing your company car.
Up to now, company cars have been regarded as expensive for tax purposes and not the best use of funds. However, since the low tax rates incentivised the uptake of electric cars, more and more people are taking up the opportunity.
If you purchase an electric car outright, say for £30k, this will attract capital allowances and reduce your taxable profit by £30,000 (in tax terms, that is a saving of £5,700). ‘Normal’ cars do not get the same tax treatment. For personal tax, as there are no emissions, the cash equivalent value based on the list price is 2%, or £600. This means you pay £120 tax (for a basic rate tax payer) or £240 (higher rate) per year on having a company car.
So if you buy an electric company car, the personal cost to you is only £120 (or £240) tax. Not only that, the £30,000 value is taken off company profits, pre-corporation tax, saving the business £6,000.
By contrast, on a £30,000 diesel car, depending on the emissions, your cash equivalent based on the list price could be around 27%, or £8,100. This means you would pay £1,620 in basic rate tax (£3,240 higher rate). The company will also have to pay £1,117 in Class 1A National Insurance.
Most business owners look to see how they can increase the money in their back pocket. If they are currently taking dividends to cover the monthly lease costs of a non-environmentally friendly car, they are having to pay tax on these dividends making the car that bit more expensive. By taking on a company electric car, the company pays for these costs leaving you the option to not spend, what historically was spent on a personal car lease.
What if you have already paid for your personal car? You can still benefit. Second hand car values have never been stronger and therefore you will be able to sell your car and keep the change to spend on something else – a holiday (that sun covered beach has never been so appealing as we look out on the damage or Storm Eunice), deposit for the kid’s house, or simply to save/invest as you feel it best.
For more help and advice on tax planning and tax efficient benefits for your owner managed business, get in touch with the Optimum team or email me, Accounts Director Michael Blaken. We help businesses across Swindon, Wiltshire, Cheltenham and Gloucestershire.