DOES it pay off to provide zero-emission cars?

Offering a company car as a benefit can be a valuable and attractive perk to any valued employee. Unfortunately, it is not necessarily a tax-free perk and it may be liable for PAYE because HMRC considers the private use of a company car to be a benefit-in-kind.

When a car is provided to an employee for private use this is considered a benefit-in-kind by HMRC.

To calculate the amount of tax an employee has to pay on the benefit-in-kind, a taxable value needs to be calculated first.

The benefit-in-kind taxable value is essentially the vehicle’s list price multiplied by the benefit-in-kind percentage.

The benefit-in-kind percentage that applies to a car’s list price is set by the Revenue for each tax year, with the 2019/20 maximum set at 37 oer cent.

The percentage is determined by the car’s CO2 emissions and fuel type (electric, petrol or diesel).

Once calculated, the taxable value is reported to HMRC using a P11D form and the employee will pay income tax on the value of the benefit at their top rate.

For example, a £10,000 benefit-in-kind for a higher-rate taxpayer (who pays income tax at 40 per cent) will result in an additional PAYE of £4,000. HMRC collects this by adjusting the employee’s tax-free allowance through their PAYE tax code.

This way, the employee pays this tax monthly over the course of the tax year along with the PAYE applicable to their salary, rather than having to pay for the tax in one lump sum. No employee NICs are due on the benefit-in-kind.

The employer is responsible for paying class 1A employer NICs at 13.8 per cent on the value of the benefit-in-kind and this is reported on form P11D(b).

Both forms should be submitted to HMRC by 6 July following the end of the applicable tax year, along with the payment for the class 1A NICs by 19 July by cheque, or by 22 July online.

Talk to us about providing employee benefits.

Laura Train