Reduce tax on your shared company car

The family car

The rules for taxing a company car which is made available to more than one employee for private use are uncontentious. However, where those involved are family members, say a husband and wife, things can get a little tricky, at least in HMRC’s eyes. The reason for this is the opportunity for couples to reduce the tax bill on a shared vehicle.

Example. Lewis and Nicole are employed by Acom Ltd. Lewis’s remuneration package is worth £95,000 per year and he’s a higher rate taxpayer. Nicole works part time for a salary of £16,000 and dividends totalling £15,000 per year and is therefore a basic rate taxpayer. If Acom provides Lewis with a company car for which the benefit in kind amount is £12,000, he’ll pay tax of £4,800 (£12,000 x 40%). If instead Acom provides the car to Nicole she’ll pay tax of £2,400 (£12,000 x 20%). It doesn’t matter much to the company who it provides the car to as the Class 1A NI and other costs will be the same either way.

In circumstances similar to those in the example above HMRC might well attack the arrangement by arguing that the car is really being made available to the higher paid spouse.

HMRC’s view

The legislation doesn’t include rules to prevent tax avoidance by allocating a company car to a lower paid director or employee rather than their higher paid spouse. HMRC instead twists the legislation that exists to ensure only one of them is taxed to attribute the car to the higher paid spouse. It will look at who the company insures to drive it, who actually drives it, plus employment contracts and other records. However, you can rebuff HMRC’s attack and ensure the benefit is taxed on the right spouse.

Make sure that the insurance policy for the car fits the usage, e.g. if the car is only to be used by one spouse make them the only named driver. Ensure that the company records specify who the car is made available to.

More than one driver

This won’t be practical if the husband and wife drive the car as both will need to be insured. Therefore, while not as tax efficient as making the car available only to the lower taxpaying spouse, making it available to both will reduce the tax to some degree and avoid unwanted attention from HMRC.

Sharing a car saves tax

Where a company car is shared, the taxable amount is apportioned on a “just and reasonable” basis between both spouses.

For a couple who each have the right to use the car, even if one actually uses it more than the other, HMRC can’t argue with a 50/50 split. In our example this would save Lewis and Nicole tax of £1,200 compared with Lewis alone being taxed on the car. However, if Nicole has use of the car more than Lewis, evidenced by mileage records, the split could be skewed in her favour which would reduce the tax further.