Contribution to running costs of company car

Is it worth it?

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To all the forum members and the admin team,

Thank you for an excellent forum, I have found many answers I needed without the need to even post the question.

I have been a member for a few years and have constantly perused the forum looking for advice which I have always found.

I am a bookkeeper only who knows little about tax but am in the process of trying to understand the basics. I do not intend to offer any tax advice at all.

Any bookkeeping I do the accounts are prepared and finalised by a qualified accountant externally.

If you don't mind me asking a question on my first post please as I am getting a little confused with company car contribution to running costs.

To me I can't see the benefit when making a contribution to running costs against the tax savings.

Here is an example in a work book I am studying

Company car value at list price £20000.00

Assume petrol car with a percentage of 25%

(20000.00 * 25% = 5000.00) BIK for use of car

(22100*25%=5525.00) BIK running costs

Therefore total BIK (10525.00*20%=2105.00) tax payable assuming basic rate tax payer.

 

Now assume same situation above but employee contributes 2000.00 to running costs

Therefore total BIK is (10525.00_2000.00=8525.00)

(8525.00*20%=1705.00 tax payable) saving 400.00 on tax payable if contribution made.

But to me this means the employee is still 1600.00 out of pocket by the 2000.00 contribution made and the 400.00 tax savings.

Can you please advise as to me it is not worth contributing to running costs in a year.

Many thanks

Kind regards

 

Replies (19)

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Portia profile image
By Portia Nina Levin
27th Jan 2017 19:15

You do not have the correct end of the stick.

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Replying to Portia Nina Levin:
By Ruddles
27th Jan 2017 19:39

You should perhaps elaborate, because in my view the OP has the principle spot on. All things being equal no-one in their right mind is going to part with £100 just to save £45 at most. (Ignoring marginally greater savings involving PA restriction, HICB charges etc).

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Replying to Ruddles:
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By thehaggis
28th Jan 2017 10:31

If by "running costs" the OP means fuel, then the fuel scale charge is not reduced by a contribution towards the fuel. It is an all or nothing charge.

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RLI
By lionofludesch
27th Jan 2017 20:06

I don't know anyone who does this - which speaks volumes.

I can see that an employer might let an employee have a car in return for a part contribution. That's the only scenario that makes sense.

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By The Highlander
27th Jan 2017 20:25

looking at it in isolation you are correct that contributing to the running cost does not in itself create a saving.

However there can be financial advantages created by the business buying the employee a car to run and the employee contributing an amount for the privilege.

The business can sometimes access tax and financial savings over and above that of the employee. You can then create a situation where financially the employee can be much better off without the employer necessarily being worse off.

You need to look at the total life cycle cost of the package for both the business and the employee to see if an advantage exists.

The contribution can be used to create a cost neutral situation for the employer, which in turn reduces the BIK tax, while at the same time the employee can be financially better off.

Thanks (2)
RLI
By lionofludesch
28th Jan 2017 08:39

Personally, I see the most likely scenario as an employer wants to give an employee some of the benefit of a free car but not the whole cost.

As Portia says, the end of the stick you have is important. Don't look at it merely from the point of view of the £2000 payment and the £400 tax reduction - you need to view the whole deal. Is getting a free car for £2000 + whatever tax bill better than buying your own car ?

Specifically, will he get the car if he doesn't pay the £2000?

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By Daystate22
28th Jan 2017 10:16

Ok thank you all for your advice.
I understand now I need to look at the bigger picture and other tax implications that I have yet to learn.

Knd regards

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Replying to Daystate22:
By Ruddles
28th Jan 2017 10:58

I am actually a little puzzled having read the question more carefully. Why are there 2 BIKs?

With a company car you have a list price based car benefit and possibly a fuel benefit. There is no such thing as a 'running cost' benefit as well.

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Replying to Ruddles:
Portia profile image
By Portia Nina Levin
28th Jan 2017 11:09

Bing!

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Replying to Ruddles:
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By Daystate22
28th Jan 2017 14:35

Ruddles wrote:

I am actually a little puzzled having read the question more carefully. Why are there 2 BIKs?

With a company car you have a list price based car benefit and possibly a fuel benefit. There is no such thing as a 'running cost' benefit as well.

Hi Ruddles,

Perhaps I should have explained better.
According to my study book there are two benefits in kind (BIK against list price of vehicle and BIK for personal use of fuel)

When the car is purchased, the employee can make a contribution against the list price of the vehicle (capital contribution, as example 2000.00) which is deducted every year from the list price before applying the appropriate percentage.

Also according to my study book the employee can make a contribution if they wish towards the running costs (revenue contribution) which is then deducted after the appropriate percentage is applied but before the appropriate tax band is applied.

Unless the HMRC themselves are wrong and accounting web is right but who am I to question?

Try it yourself with the example I provided use 2015/16, one without a contribution to running costs, one with a contribution to running costs.
Also notice how the HMRC apply the contribution after the appropriate percentage is applied.
Also try capital contribution of 2000.00 and you will see it is calculated differently.

http://cccfcalculator.hmrc.gov.uk/CCF0.aspx

Kind regards

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By Daystate22
28th Jan 2017 14:44

Here are the answers based on a list price of 20000.00 and 25% applicable rate.

No private fuel and no capital contribution 5000.00 taxable BIK

No private fuel and 2000.00 capital contribution 4500.00 taxable BIK

No capital contribution and private fuel 10525.00 BIK

No capital contribution and private fuel with 2000.00 revenue contribution 8525.00 bik

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By FoxAccountancyServices
28th Jan 2017 16:37

When you say "contributing to running costs" what you actually mean is a "contribution towards private use". This reduces the cash equivalent, which will be taxed.

If the employee is required to make a contribution towards to the benefit, and actually does so, these contributions reduce the cash equivalent, and thus the tax payable. However, the contributions must be specifically related for the private use of the car. If the contribution is towards a specific aspect of the cars running costs, such as insurance, or is to enable the employee to have use of a more expensive car, then the payments will not be deductible.

What the book is trying to get you to do, is think about both ways an employee can contribute, and teach you to do the calculations. Probably to pass an exam, rather than to turn you into a tax planning guru!

In the capital contribution scenario, you save £100. If you put your £2k towards private use, you save £400.

However, paying the £2k capital is a one off, whereas the £2k private use (PU) is every year. Unless you get a new car every year!

And then there is the different tax rates...

Capital tax savings = £100, £200, £225
PU tax savings = £400, £800, £900

It might be the employee can get a better car, if they do a capital contribution, because the boss has given them a budget.

It might be that the boss forces a private use contribution.

Whilst owner directors use more tax efficient ways to get money out of the company (to cover the cost of their car) for an employee, a company car is still a real bonus, especially if they are want a nice car, or even cant afford a car!! The employee has got the use of a £XXXXX car for the cost of £XXX tax. Then you way up the cost of tax, to the cost of the car each year... Can they HP and run that car for less than the tax.

Generally fuel benefit is a no-no, unless they have huge fuel costs a year (maybe from a long commute). A fuel only mileage rate could be claimed. So again, its about weighing up the tax payable, verses what it would cost the employee to pay it themselves. £22100 x 25% x 20% = £1105. Well if I am basic rate tax payer and I spend £2k on fuel a year, I am quids in if my employer pays. If I am 40% tax payer, not so much!

Hope this helps some!

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Replying to FoxAccountancyServices:
RLI
By lionofludesch
28th Jan 2017 16:35

FoxAccountancyServices wrote:

However, paying the £2k capital is a one off, whereas the £2k private use (PU) is every year. Unless you get a new car every year!

Here we disagree. It is effective over the entire period of the provision of the car and the longer the car is held, the more benefit the beneficiary gets.

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Replying to lionofludesch:
By Ruddles
28th Jan 2017 16:43

Yes, but at 25% BIK rate, a £2k capital contribution is going to save you £225 at best per year. How many employees do you know that hold on to a company car for over 10 years?

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Replying to Ruddles:
RLI
By lionofludesch
28th Jan 2017 17:26

True - but I go back to "what's the deal?"

If I could get a new car for three years, expenses-except-fuel paid, for a down payment of £5000 and an annual increase in my tax bill of £800 or so, I'd snap my employer's hand off.

It's a different matter if you actually own the company 100% and the car costs are effectively coming out of your own pocket.

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Replying to lionofludesch:
By FoxAccountancyServices
28th Jan 2017 18:09

My guess is the OP is reading an ATT or AAT personal tax textbook - the employee benefits section - which will simply show the two ways employees contribute, and how to calculate the BIK, for the exams. It doesn't really go any further into it, than that.

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Replying to lionofludesch:
By FoxAccountancyServices
28th Jan 2017 16:51

Hi Lion

Was a long post already, and would take too long to go through every scenario... trying to get OP just to think about the different angles.

The OP seems to be asking why anyone would decide to make a capital contribution/PU contribution, and to my mind, which is pretty tired right now, I'll admit, I see no benefit in doing that, based on these figures, other than what I have said - to get a more expensive car due to employer budget, or, because it was mandatory - you wouldn't want to lose out on the benefit of a car entirely, for the sake of £2k.

But what the OP says... If I save £100 by contributing £2k, I would have to hold the car 21 years to make it worth me parting with my cash, if I didn't have to... from a cashflow point of view, makes sense... but as we have all pointed out, that's not point of the question he is reading, or the way to view it in real life.

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Replying to FoxAccountancyServices:
RLI
By lionofludesch
28th Jan 2017 17:37

FoxAccountancyServices wrote:

Hi Lion

Was a long post already, and would take too long to go through every scenario... trying to get OP just to think about the different angles.

Accept what you say and my point seems to be the same as yours. The OP assumes that the taxpayer makes contributions just to save tax - but that may not be his motivation. He may need to pay them to get the car he wants.

Having said that - I've never come across them in practice. Either a capital or annual contribution.

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By Daystate22
28th Jan 2017 17:57

Thank you all for your replies!

I understand it a lot clearer now, I was looking at it as if, why would an employee make contributions to a company car to reduce taxable income?

I hadn't looked at it from the different angles as described, I can now see how different scenarios will have different implications.

The replies I have received have led me to another question,but I won't ask. I may come across the answer further on in my studies, as the saying goes "every answer leads to a thousand more questions".

Anyhow enjoy your weekend and thank you all for your help!!

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