Another recent change that may also have increased the cost of being provided with a luxury company car is the 50% additional rate of income tax that has applied since 6 April 2010 to directors and employees with taxable income over GBP150,000.
For example, a director with taxable income of GBP200,000 is provided with a Ferrari 458 Italia as a company car. For 2010-11 the director would have paid income tax of GBP14,000 (GBP80,000 x 35% = GBP28,000 at 50%) in respect of the company car. In 2011–12 this tax cost will rise to GBP30,100 (GBP172,000 x 35% = GBP60,200 at 50%). The tax cost will therefore more than double from 2010-11 to 2011-12.
From 6 April 2011 NIC rates have increased by 1%, so the employer's class 1A NIC in respect of the Ferrari has risen from GBP3,584 (GBP28,000 at 12.8%) for 2010-11, to GBP8,308 (GBP60,200 at 13.8%) in 2011–12.
The drastic increase in the tax cost of having the use of a luxury company car after 6 April 2011 may mean that it is beneficial for a director or employee to instead receive additional remuneration and then to acquire or lease the car themselves – even if the director or employee is paying the 50% additional rate of income tax.
Let's assume the following for 2011–12:
- A Ferrari 458 Italia is leased for GBP45,360 (including VAT).
- The employer pays corporation tax at the marginal rate of 27.5% (the fact that this may be different for the five day period 1 April 2012 to 5 April 2012 will be ignored).
- The director pays income tax at the additional rate of 50%.
- Employee's NIC is 2% and employer's NIC is 13.8%.
If not provided with a company car, the director will save income tax of GBP30,100 (as per previous calculation). The additional net of tax remuneration needed is GBP15,260 (GBP45,360 - GBP30,100), so the gross remuneration required will be GBP31,792 (GBP15,260 x 100/(100 - (50 + 2))).
The employer will pay NIC of GBP4,387 (GBP31,792 at 13.8%), so the total net of tax cost for the employer is GBP26,230 (GBP31,792 + GBP4,387 = GBP36,179 less corporation tax relief at 27.5%).
If the employer had leased the company car then they would have paid leasing costs of GBP41,580 (GBP45,360 less the 50% VAT recovery) and class 1A NIC of GBP8,308 (as per previous calculation). Only GBP35,343 of the leasing costs receive tax relief, so the total net of tax cost for the employer is GBP37,884 (GBP41,580 + GBP8,308 = GBP49,888 less corporation tax relief of GBP12,004 (GBP35,343 + GBP8,308 = GBP43,651 at 27.5%)).
It is therefore more beneficial to pay additional remuneration in this instance.
The constantly changing tax rules make it very difficult to plan ahead when choosing a new company luxury car, or even whether to have a company car at all. Although some changes are announced a year or two in advance, it now appears that the additional rate of 50% will only be temporary, but as yet no fixed date has been given for its abolishment.