Your company provides a car which you and your other half share. Naturally, there’s tax to pay on this benefit in kind but how can you arrange it so that it’s charged at the lowest possible rate?

New rules for perks

Until 6 April 2016 certain benefits in kind, including company cars, were only taxed on employees who earned over £8,500 per year, including the value of the benefit, and all directors. Since then tax applies to all employees and directors regardless of their rate of pay. Nevertheless, one of our subscribers wants to use her company to pay for a car for her and her husband to use, and wants to know whether it can be done tax and NI free.

High income and low income

Currently, the husband’s company pays for and provides a car on which he is taxed. As he’s a higher rate taxpayer he pays around £2,800 per year for their joint use of an Audi A4. The wife’s level of income means she currently pays no tax. If it were her company car she would be taxable on it, but after knocking off her personal allowances she would pay nothing. It seems mad not to rearrange things so that the car benefit falls on her instead of her husband.

Anti-avoidance rule

There are anti-avoidance rules which can prevent companies reducing the tax by providing cars to directors’ spouses and other members of their family instead of them. However, the good news for our subscriber is that these don’t apply where the car is provided to a director and he or she is liable to tax on it. The fact that no tax is actually payable is irrelevant.

National Insurance

The news is not so good for NI. An employer must pay Class 1A NI contributions at 13.8% on the taxable value of a company car regardless of whether the director has to pay tax on it. NI will be payable whichever company provides it and whoever is taxed on it.

Company tax

The corporation tax position is also neutral. Whichever company provides the car can claim tax deductions for the purchase, running costs and the Class 1A NI bill. However, because our subscriber’s company has far less income than her husband’s they need to watch this. If the car expenses start to outweigh the company’s profit she should consider whether it’s still tax efficient to keep the car in her company.

Tip. In that event it won’t save tax overall to sell the car to her husband’s company so that he becomes taxable on the benefit again, but it might be worth taking the car out of the business altogether. The only way to check this is to crunch the numbers at the time. This is probably a job for their accountant as the numbers can be tricky.

Insurance

While not a tax issue, our subscriber should make sure that when her company takes on responsibility for the new car that the insurance policy covers use by both her and her husband. If they stick with the same insurer her husband’s company currently uses, that shouldn’t be an issue.

This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.