Do personal contributions save company car tax?

Car benefit

You’re probably aware that you can reduce the tax and NI payable on a company car by contributing a lump sum towards the cost. The tax and NI saving is limited to contributions of no more than £5,000. If you’re an employee a contribution isn’t cost effective; but as an owner manager of a company it can save you money.

Reduction in taxable benefit

A contribution of up to £5,000 is knocked off the list price used in working out the taxable amount of car benefit. For example, the benefit for a company car with CO₂ emissions of 125g/km is 30% of its list price. A contribution of £5,000 towards its cost therefore reduces the car benefit by £1,500 (£5,000 x 30%). As a higher rate taxpayer this would save you £600 tax per year and your company £207 in Class 1A NI. This sounds promising but it’s only half the story.

Return of capital

When you change your company car it will have devalued and so will your contribution towards its cost. HMRC’s interpretation of the rules is that if, say, a car is worth 40% of its original list price at the time it stops being your company vehicle your contribution will have shrunk by the same proportion, i.e. to £2,000 (£5,000 x 40%).

If your company repays no more than the depreciated amount of contribution HMRC is happy. If it repays more HMRC says the excess reduces the contribution and thus the tax saving retrospectively (see The next step ). While we don’t agree with HMRC’s conclusion, it has a point and there must be some form of tax adjustment to reflect any excess repayment of your contribution. In that light HMRC’s approach doesn’t seem unreasonable. As a result the tax and NI saving can be less than your contribution which makes the arrangement a washout.

Example. The tax and NI savings for a £5,000 contribution towards a car with CO₂ emissions of 79g/km would save you tax of £400 per year and your company £138 in NI. Over four years that’s a total of £2,152 which, assuming a return of 40% (£2,000) of your contribution, is less than the £5,000 you personally stumped up. By contrast, the tax and NI saving for a car with CO₂ emissions of 165g/km would be £3,766, which with the £2,000 repaid to you, exceeds the £5,000. However, there are yet more factors to consider.

Company’s tax position

The contribution you pay to your company for the car reduces the amount of tax relief it can claim for its cost. Using the details from our example, your company would lose corporation tax relief on £3,000 (the amount of contribution after the £2,000 refunded to you). Against this it saves £966 in Class 1A NI. These factors reduce the tax and NI saving from your contribution but won’t usually eliminate it.

If you’re the owner manager of a company which provides you with a car as a benefit in kind, and it produces moderate to high CO₂ emissions you can save tax and NI by contributing up to £5,000 from your personal funds towards its cost.