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The real cost of a Company Car for Directors

Calculation to understand the real cost to company directors for running a company car

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It seems that company cars are no longer the benefit they used to be, but I wanted to understand the exact costs to see if it is still worth considering. 

My calculations suggests as a basic rate company director, when you consider all costs you are better taking a company car than salary. However, if you consider dividends there's nothing in it. I've used  a car with a high BIK rating, if you are more sensible the company car makes even more sense. If you are a higher rate tax payer, the story is the same. For the sake of ease, I'm gonna use basic rates below. To calculate salary and dividends, I've used a cash allowance that after tax would allow you to lease the same car. It's also worth noteing as my company is running at a lose, I couldnt use the dividends route anyway. Another thought, as my company is running at a lose I don't draw a salary. I assume company car tax is still 20%. But what if my self employed income is taxed at 40%, does this affect anything? 

But alas, am I missing something. I fear I am as everyone says company cars are bad. But I think I've included everything. Please see my figures below and tell me if I have missed anything. I've also attached my spreadsheet so you can see calculations.

Company Car

  • Porsche 718 Boxster 2.0 Boxster
  • Monthly rental £814
  • Initial payment £2,443
  • Yearly cost £10,585
  • Tax year to 5th April 2020/21
  • P11D value                £46,651
  • Percentage charge         37%
  • Benefit in kind        £17,261
  • Tax payable at 20% £3,452

Total yearly cost to Director £14,037

Salary

  • Cash Car allowance £15,600
  • Employee Tax 20.00% £3,120
  • Employee NI 12.00% £1,872
  • Employee Tax & NI £4,992
  • Employee take home £10,608
  • Employers NI 12.00% £1,872
  • Total Empoyers & Employee Tax & NI £6,864

Total yearly cost to Director £17,449

Dividends

  • Cash Car allowance £11,450
  • Yearly Dividend Tax 7.50% £859
  • Take home £10,591
  • Corprtation tax 19.00% £2,176

Total yearly cost to Director £13,619

Filecompany_car.xlsx

Replies (24)

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RLI
By lionofludesch
11th Jul 2020 11:27

You're right. Company cars make less and less sense as time goes on - percentages aren't going to drop.

The only situation that makes sense is a cheap car with a high mileage.

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Replying to lionofludesch:
Psycho
By Wilson Philips
11th Jul 2020 11:30

I disagree. An expensive car, with high running costs and high private mileage might be better off in the company.

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My photo
By Matrix
11th Jul 2020 11:29

Assuming this Director owns the company given you mention dividends, you need to include the cost to the company including Class 1A NI and the tax relief on the car.

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Replying to Matrix:
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By MichaelWGroves
11th Jul 2020 11:47

Thanks, I knew something must be missing, that makes sense. I've adjusted the figures to include Class 1A NI. This means Dividends wins, but car still wins over salary.

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By paul.benny
11th Jul 2020 11:42

You've omitted maintenance, licence and insurance on your examples. They don't alter he bik and they're allowable expenses of the employer whereas on employee owing the car must find from after tax income with no deduction.

And you've omitted payments for business mileage, which can defray some of the costs of a privately owned car.

A furtheajor factor is whether a private buyer would acquire the same vehicle and have the same replacement cycle.

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Replying to paul.benny:
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By MichaelWGroves
11th Jul 2020 11:55

Maintenance and tax has been included in lease costs, I should have made this clear. But you are correct with insurance. This is a further benefit of the company car. I'll include in figures.
I assume millage would not be an issue, obviously you can only claim the fuel element, but this should even out?
I've assumed same car for company lease and private lease so we are comparing apples with apples. As this is for company director, this is fixed.

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Replying to MichaelWGroves:
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By paul.benny
11th Jul 2020 14:55

Driver of a privately owned car could claim 45p/mile for business mileage - so about 30p/mile more than just fuel.

There are quite a few other errors in your numbers - Employer NI is 13.8% and you've ignored both the zero rate band below the secondary threshold and the reduced rate of employee NI above the upper earnings limit. For company lease, you can recover some of the VAT on the lease rentals.

More generally, if you company is loss-making to the extent that you are not drawing a salary, what on earth are you doing thinking of leasing a luxury car?

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Replying to paul.benny:
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By MichaelWGroves
12th Jul 2020 20:03

I understand what you are saying about millage claim, but surly the extra 30p just covers the extra wear & tear and depreciation, so it should even out. Remember we are talking about a lease car.

Thanks, well spotted on the Employers NI, schoolboy error.

You are correct on the zero rate and secondary threshold; I ignored these for simplicity, but in reality I need to include to get the real figure.

You make a good point on vat, currently I am exempt, but might be worth registering, I think 100% of my customer base can reclaim. So might be worth it.

The company is a start-up, first 2 years show a trading loss, but in reality the company is now profitable. My main source of income is through self employment. Which leads me onto my last question; if self employment income is higher rate, but employed is basic rate; is company car taxed at basic rate of higher rate?

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Replying to MichaelWGroves:
RLI
By lionofludesch
13th Jul 2020 07:11

MichaelWGroves wrote:
My main source of income is through self employment. Which leads me onto my last question; if self employment income is higher rate, but employed is basic rate; is company car taxed at basic rate or higher rate?

Oh dear. I don't know where to start ......

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Replying to MichaelWGroves:
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By CS777
13th Jul 2020 10:02

MichaelWGroves wrote:

The company is a start-up, first 2 years show a trading loss, but in reality the company is now profitable. My main source of income is through self employment. Which leads me onto my last question; if self employment income is higher rate, but employed is basic rate; is company car taxed at basic rate of higher rate?

Thank you - gave me a giggle and really cheered me up this morning.

Time to get an Accountant, rather than making more mistakes than you have already made ove the last few years doing a bad DIY job, before HMRC catch up with you.

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By frankfx
11th Jul 2020 15:15

Cost to the planet ? Not factored in your calculations, our children are picking up that tab.

Bike may be friendlier all round, and some tax reliefs tossed into the mix.

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By Paul Crowley
11th Jul 2020 16:50

Company making a loss?

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By seandrowe
13th Jul 2020 10:12

Company cars aren't really effective, unless you switch to an electric car... Tesla's work out comparatively cheap to run as a company car despite the eye watering list price.

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Replying to seandrowe:
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By MichaelWGroves
13th Jul 2020 13:48

If you are looking for cheap green motoring, then I agree an electric car is a good solution. But if you want the car you want, my figures suggest it's more cost effective to have a company car over salary. But if you can take dividends, this would be the most cost effective way.

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Replying to MichaelWGroves:
RLI
By lionofludesch
13th Jul 2020 13:55

Thanks for your insight and detailed analysis.

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By [email protected]
16th Jul 2020 11:40

Without working through the numbers it's hard to say but on top of the things other have noted as missing I see no mention of class 1a NIC
And BIK generally ends up as a top slice on your Self assessment return so if other income has already pushed the director into the higher rate that's what they'll pay on the BIK

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Replying to [email protected]:
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By MichaelWGroves
18th Jul 2020 09:19

Thanks, yes I missed Class 1a NIC, this was also pointed out earlier in the thread. I've now added this to the spreadsheet. I'll look to upload the updated spreadsheet so others can play with figures.

That makes sense that BIK would get picked up in Self Assessment, if that is the case this would certainly make the company car the most expensive option.

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By dmmarler
17th Jul 2020 06:34

Tax is not everything.

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Replying to dmmarler:
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By MichaelWGroves
18th Jul 2020 09:12

In this scenario tax is everything, we are looking at the real cost to a company director. So maintenance etal falls down to the same person regardless. Otherwise all your points raised below would be valid.

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By dmmarler
17th Jul 2020 06:32

There are other things. Take time lost - the time it takes to deal with maintenance, or other car problems. If the car is owned by the company, then the employee can delegate getting the car to the garage and back, organising a replacement vehicle, and any other time-consuming activity to another employee. If the individual owns the car, then they have to sort it all out for themselves and take time out. Where the employee is a specialist lawyer, or other expensive individual, then it makes sense to enable them to free up their time by relieving them of car management.
Then there is insurance; if the car is owned by the company it will be insured to the right standards, but if it is owned by the individual some shortcuts may be taken. Going back to maintenance, where the company deals with this it will know everything has been done to the correct standard, if it is the employee's car then again the employer's responsibility to ensure the employee was driving a roadworthy vehicle on company business could be compromised (even with a lease car). The employee's car could be borrowed by another family member ... I could go on.
The decision is not just about the tax, it is about overall costs and potential liabilities, and the general level of risk. (The company owned vehicle also makes a statement about its values, so is part of its own public relations messages.)

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Replying to dmmarler:
RLI
By lionofludesch
18th Jul 2020 09:55

dmmarler wrote:

There are other things. Take time lost - the time it takes to deal with maintenance, or other car problems. If the car is owned by the company, then the employee can delegate getting the car to the garage and back, organising a replacement vehicle, and any other time-consuming activity to another employee.

Nonsense. Who can drive the car is dictated by who's on the insurance policy. Not ownership.

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Replying to lionofludesch:
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By dmmarler
20th Jul 2020 05:13

I disagree. Who can drive the car depends on who has permission to drive, and the available insurance to each of those parties. You are then into the scenario as who has permission, and who can further delegate that permission and in what circumstances. It is not as straightforward as you suggest.

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Replying to dmmarler:
RLI
By lionofludesch
20th Jul 2020 05:34

Not sure how much you're disagreeing there.

We agree it's more about insurance than ownership.

There's nothing to stop me sending my employee to the garage with a car which I own, provided he's insured to do so.

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By MichaelWGroves
18th Jul 2020 09:26

I've updated the spreadsheet to include everyone's comments where I missed bits.
I hope this exercise will be beneficial to others, it certainly has been for me.
Thanks everyone for your input.

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