Exchequer Weblog

If you drive a company car you need to keep an eye on the tax you pay for using the vehicle, as this is likely to increase year on year.

The tax charge is related to the car’s CO2 emissions and its price. An average car has CO2 emissions of around 160g/km, which means for a petrol car the driver is taxed on 20% of the vehicle’s list price every year. This percentage will increase to 21% from 6 April 2010, and will be 22% from 6 April 2011.

The list price is the show-room price for the car, not what your employer actually paid including discounts. Currently the list price used for the tax calculation is capped at £80,000, but from 6 April 2011 this cap is removed. This will hit drivers who get their own companies to pay for top range cars.

Say you drive an Aston Martin DB6 costing around £160,000, which has CO2 emissions off the scale. In 2009/10 you are taxed on £28,000 (35% x £80,000). At the 40% tax rate this amounts to a tax bill of £11,200. From April 2011 you will be taxed on £56,000 (35% x £160,000). At the top tax rate of 50% that will apply in 2011/12, this will produce a tax bill of £28,000.

If you drive an alternative fuel car, such as a hybrid, bio-fuel, or E85 fuel, you currently get a reduction in the tax charge compared to normal cars. This discount will be removed from 6 April 2011 for all alternative fuel cars, except for pure electric cars, which will still be taxed on 9% of their list price.

So the message is: get that expensive car out of your company ASAP, and if you must drive a company car, may be it’s time to start thinking electric, or at least very low CO2 emissions.

Low property prices are tempting some people to acquire residential properties to develop and sell when the market improves. If you intend to do this, the Tax Inspector may argue that you are actively trading in properties, rather than just investing and letting.

If you are considered to be trading in properties it will have the following tax consequences:

• - All the gains you make on selling the properties will be subject to income tax at 20%, 40% or 50% rather than capital gains tax at 18%.
• - NI will also be due on top of these income tax rates.
• - You will not be able to set your annual capital gains exemption (£10,100 for 2009/10) against the gains made from selling properties.
• - If you run the property business through a limited company the difference in tax rates will be far less.
• - You may need to register for VAT.
• - Any rents received may be taxed as incidental trading income.
• - The value of your business should attract a 100% exemption from inheritance tax as business property.
• - You can get tax relief for indirect or abortive expenses connected with buying and selling properties.
• - Any losses you make by trading in your own name can be set against your other income.
• - You may qualify for entrepreneurs’ relief if you sell your whole property business.

You can still save tax by operating your business through a company rather than as a sole trader or partnership, but the level of tax savings will depend on the range of salary, dividends and benefits that you want to take out of the company.

If you take a salary equal to the personal allowance of £6,475, and extract the rest of the profits as dividends, you could make the following tax savings in the current tax year. This salary level involves paying some NICs as the NIC threshold is £5,715, but a lower salary would waste part of the dividend tax credit. Salary is also tax allowable for the company whereas dividends are not.

For 2009/10 the following shows for different profit levels the tax payable as a sole trader, by incorporating as a company and the total saving…

• Profits £15,000: Sole trader: £2,573 - Company £1,951 - Total saving: £622
• Profits £30,000: Sole trader: £6,773 - Company £5,101 - Total saving: £1,672
• Profits £50,000: Sole trader: £13,169 - Company £9,463 - Total saving: £3,706
• Profits £100,000: Sole trader: £33,669 - Company £29,838 - Total saving: £3,831
• Profits £150,000: Sole trader: £54,169 - Company £50,213 - Total saving: £3,956

There are other tax factors to consider. For example…

• - If the company owns a car that is used privately by the business owner, this can seriously reduce the tax savings. However, the answer is not straight forward as it depends on the cost, age, and CO2 emissions of the car (see below).
• - The amount of profits left within the company for future use. If dividends are only taken to take your income up to the level of basic rate tax, substantial further savings of many thousands are possible!
• - The availability of tax-free benefits such as childcare vouchers.
  Tax rates are due to increase from 2010/11. Individuals will pay a top rate of 50% on income over £150,000 and the personal allowance will be withdrawn for those with income over £100,000. The tax rate paid by a small company will also rise to 22%. These changes will reduce the tax savings to be made by operating through a company. The calculations summarised as follows for 2010/11 assume a salary equal to a personal allowance of £6,635, which is reduced to nil when profits exceed £113,000.
• Profits £15,000: Sole trader: £2,530 - Company £2,004 - Total saving: £526
• Profits £30,000: Sole trader: £6,730 - Company £5,304 - Total saving: £1,426
• Profits £50,000: Sole trader: £12,998 - Company £9,704 - Total saving: £3,284
• Profits £100,000: Sole trader: £33,448 - Company £30,273 - Total saving: £3,215
• Profits £150,000: Sole trader: £56,642 - Company £53,633 - Total saving: £3,009

If you are unsure whether this is likely to benefit your existing business setup then Exchequer Business Services can provide a calculation specific to your circumstances and outline the many other factors you will need to consider when incorporating.