Financial Focus On... Cheap motoring for young drivers
27th January 2015 by Robin Beadle
The costs of insuring a car for a young driver these days are extremely high. Seen as high risk by the insurance companies, many insurance premiums can top £1,200 per year, even on small cars. As a result, these days, motoring for young drivers often has to be subsidised by their parents.
But is there a more efficient way of funding young drivers’ motoring costs? The answer is yes, but only if your circumstances permit and you can be flexible with your remuneration package. Therefore, this is more for Owner-Managed Businesses rather than for employees of large organisations.
Let us assume that an 18 year old boy has passed his test and wants his own car. His father, a company director, earning £50,000 p.a., will be called upon to pay for the car and the insurance. The annual insurance will cost £1,200, and the servicing, repairs and road tax (if applicable) add a further £400 each year. Using the 2014/15 rates throughout, from the Company’s point of view, the £1,600 annual cost will be equivalent to an additional required salary or bonus of £2,759 as Dad is a 40% taxpayer (and also suffers the additional 2% National Insurance charge). The total cost to the Company, after taking into account the cost of the salary, Employer’s NIC liability and Corporation Tax saved at 20% amounts to £2,512. The Government’s total tax take amounts to £912.
However, if the Company provides the car, the Company Car will become part of the director’s benefit package and, rather surprisingly, can cost everyone (apart from the Government) less.
If we specify that the car in question is a petrol Peugeot 106 Active (with Stop/Start) with a list price of £9,745 and a Carbon Dioxide (CO2) emission figure of 88g/km, the company car benefit (gross salary equivalent) for 2014/15 could be as low as £1,072. That gives rise to a tax bill, for the director personally, of only £429 compared to the £1,159 tax and National Insurance liability for taking an additional salary. For the Company, whilst it will have a Class 1A NIC liability on the gross value of the benefit (amounting to £148 in this example), it will also be able to claim as a deduction the amount of insurance and other costs it pays. Therefore, by providing the car and paying the insurance costs through the Company, the cost to the Company would amount to only £1,398 after saving Corporation Tax of £350. The Government’s total tax take is now only £227.
At this stage, I have only discussed the regular running costs, assuming the young driver pays for his own fuel. Ignoring any complicated lease options, if the car costs £9,745, the choices are, again, either additional salary or purchase by the Company. By the salary route, a post-tax bonus or additional salary of £9,745 has a gross equivalent of £16,802; the total cost to the Company is £15,296 and the Government’s total take is a whopping £5,551.
But as Capital Allowances can be claimed by the Company providing the car, if the car is particularly fuel efficient as in this example, the legislation currently allows for the entire cost of the purchase of the new (not second hand) car to be written off by the Company in the year of purchase via a 100% First Year Allowance (although watch out, the emissions limit for this drops from April). This then makes the cost to the Company of providing the car £9,194 (including the net benefit charges above) and… (wait for it)… the government pays £1,722 overall.
What are we left with? Surprisingly, we are left with the fact that it is substantially cheaper to provide a company car to an 18 year old as part of the benefit package of his parent than for the car to be paid for out of post-tax salary.
The above example has made some basic assumptions. Each individual case and the level of savings will have to be worked out separately depending on the precise car, insurance cost, running cost and salary in question. Equally, there are lots of non-tax implications and responsibilities that would need to be considered.
For further information on any of the above points or to discuss your tax affairs generally, please do not hesitate to contact Robin Beadle.
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