Providing a car for an employee to use can give rise to a taxable benefit, which can be costly for both the employer and employee. This may be the case even if you provide a car to an employee to travel around specifically for business purposes (for example a sales rep); where the car is kept at the employee’s home overnight, it is considered to be “available” for private use, even if there is no actual private use, and thus a benefit may be assessed on the employee.
What is a car?
Not all vehicles are classed as “cars” for benefit purposes. Here’s what isn’t a car:
- a vehicle of a construction primarily suited for the conveyance of goods (it is irrelevant how it is actually used – it’s how it’s constructed);
- a vehicle of a type not commonly used as a private vehicle and unsuitable to be so used;
- a motor cycle;
- an invalid carriage.
If it is a mechanically propelled vehicle not meeting any of the above definitions, it’s a car.
What is the benefit value?
The benefit value is the list price of the car (including VAT and delivery charges), plus certain accessory costs, multiplied by a percentage based on the car’s emissions. For 2019/20:
- An electric or petrol hybrid car with emissions of 50g/km or less is multiplied at 16%;
- A petrol car with emissions of 51-75g/km is multiplied at 19%;
- A petrol car with emissions of 76-94g/km is multiplied at 22%;
- Thereafter, the percentage increases by 1% for every 5 additional g/km, e.g. emissions of 150-154g/km for a petrol car = 31%;
- The maximum percentage charged for cars is 37%, which for petrol cars applies at 165g/km or more.
Cars propelled solely by diesel are subject to an additional 4% charge, to a maximum of 37%. For example, emissions of 150-154g/km for a diesel car = 37%, compared to 34% for petrol.
The benefit value of a petrol car costing £15,000, with emissions of 150 g/km (34%), will therefore be £5,100. This amount is reduced accordingly if the provision of the car started or ended part way through the tax year.
This amount - £5,100 – will be reported on the employer’s P11d(b) declaration, which must be filed annually by 6th July following the end of the tax year. The employer pays Class 1A National Insurance of 13.8% on the value of the benefit – in this example, £703.80 would be due by 22nd July. The employee is given a copy of their individual P11d, showing only their benefit - £5,100 is added to their income by HMRC, and the employee pays the tax on the benefit value through a tax code adjustment, for example, a Scottish higher-rate taxpayer would pay tax of 41% (£2,091.00 per year).
Are there any exceptions?
There are certain circumstances where no taxable benefit will arise. For example, in relation to the provision of a car there will be no benefit if both of the following conditions apply:
- private use of the car is prohibited – there must a legally enforceable ban on private use (for example, a term in an employee’s contract); and
- there is actually no private use, which the taxpayer must be able to demonstrate, e.g. a record of journeys made (noting mileage and purpose) - remember that private use includes travel between home and a permanent place of work.
The benefit value will also be reduced accordingly for periods when the car is unavailable due to being incapable of being used (e.g. it has broken down) for at least 30 consecutive days. The benefit may also be split if there are multiple users of the car.
The benefits calculations do not apply to sole traders and partnerships using business cars privately, unless they are providing a car to an employee, however, they do apply to directors.
An employee may also be provided with fuel for using a car for private purposes, but there is an additional taxable benefit in doing so. The benefit is £24,100, multiplied by the same percentage as that on which the car benefit is assessed. The fuel benefit provided for the car in our earlier example, would be valued at £24,100 x 34% = £8,194. This amount is charged irrespective of the actual amount of fuel provided to the employee during the tax year. It means that in our example the employee would be charged a total benefit of £13,294 for car and fuel, which results in £1,834.57 of Class 1A National Insurance for the employer to pay, and £5,450.54 of income tax for a Scottish higher-rate taxpayer.
Even if the vehicle is not a car for benefit purposes, e.g. a pick-up, a taxable “van benefit” may still arise if it’s made available for private use by an employee, although this benefit category is much more favourable, being just a standard benefit figure of £3,430 for the provision of the van, and £655 should the employer also provide the fuel.
It is worth checking the benefit value before purchasing a car for an employee to use, for example combi vans, despite their name, may be classed as cars, due to the extra passenger seats rendering them of a construction not primarily suited to the conveyance of goods. Due to the cost and emissions of these vehicles, the benefit value can be hugely different to that of a “van”, and may impact on the employer’s decision to go ahead with a new purchase.