Tax Q&A: Company cars

Tax Q&A: Company cars

Each month Frank Haskew and Francesca Lagerberg of the ICAEW's tax faculty provide pracitcal advice on topical tax issues.

Question:

Who are the winners and losers in the company car lottery?

Answer: From April 2002 the taxation of company cars is changing. The new rules are based on the carbon dioxide emissions that a car emits – the higher the emissions, the greater the charge although the maximum charge remains 35% of the list price. There will be no reductions for business mileage or age. Further, existing cars move straight onto the new system. A wrong choice now may seriously affect your wealth later!

The main losers under the new rules will be those driving high performance cars with high business miles. The winners will be the perk car drivers already paying tax at 35%; they cannot be worse off under the new rules than they are at present.

Take Mr Prestige, a 40% taxpayer, who drives 20,000 business miles a year in a Jaguar XJ8 with a list price of Pounds 36,000. His tax charge in 2001/02 will be:
Pounds36,000 x 15% = Pounds5,400 @40% = Pounds2,160

From 2002-03, this charge goes up to:
Pounds 36,000 x 35% = Pounds 12,600 @40% = Pounds 5,040

In other words, the tax charge increases by Pounds 2,880 a year or Pounds 240 a month, from Pounds 180 a month to a mighty Pounds 420 a month. Mr Prestige needs to decide whether choosing this car is worth a 133% hike in his tax bill.

But if you take Mr Regular, also a 40% taxpayer but with no business miles a year, who drives a Ford Mondeo 1.6i with a list price of Pounds 16,000, his tax charge under the new rules will actually decrease from Pounds 2,240 this year to Pounds 1,216 in 2002-03.

If you need help, try Deloitte & Touche’s free car tax calculator. You will need to input the list price and the CO2 emissions of you car.

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