A big Question – Do I opt Out?

As benefit in kind rates continue to rise, an increasing number of company car drivers are considering opting out of their company car scheme. Any non company car driver will say that you must be mad to opt out, thinking that you should be eternally grateful for a company car. Is it not a fantastic perk after all? Unfortunately, the financial truth is far from the regular free brand new car that people may imagine it is. The tax man at HMRC makes sure of that, although even most company car drivers don’t realise quite by how much.

A Personal Example

Here is a personal example. Three years ago I took delivery of a brand new Jaguar XE 2.0 diesel company car, on the road price around £36,000, leased to my company by Lex Autolease. Manufacturer’s stated emissions 109 gms/km CO2. The first thing to note is that any benefit in kind (BIK) tax you pay on a company car is at the FULL LIST PRICE of that car. It does not allow for any discount your lease company may have negotiated with the manufacturer or dealer network. In 2019 the benefit in kind tax rate for that pretty frugal Jaguar would be 28%, devised from 25% for petrol cars plus 3% diesel adjustment. You can check out the BIK rates here.

The Taxman’s Cut

So, for benefit in kind annual tax purposes HMRC takes the full list price value of the car and multiplies it by the BIK rate, ie 28%, which comes out at £10,080 per annum. Now, the tax man assumes I have had this value, or benefit in kind, so now wants the tax on that amount at my highest rate each year. I pay 40% tax, so I now owe the HMRC 40% x £10,080 or £4,032 per year in tax. In reality your company (or you) should tell the taxman that you have a company car so that this money can be taken monthly to avoid any nasty shocks. In other words, if I still had my company jag in 2019 my tax code would be adjusted so I would be paying £336 per month in addition to my regular tax on salary.

The Real Issues

So, I’m paying £336 for a company car for which:

  • I pay tax on as if I receive 28% of the full, brand new list price of the car every year.
  • Out of 30,000 miles per year I do 3,000 personal miles max, c10%!
  • The car is very quickly dropping in value, yet I still pay tax on the brand new list price (not Lex’s negotiated price!) every year!
  • Over 3 years I have paid tax as if I’d received a BIK of 84%* of the car’s full list price (28% per year), yet only 10% of its use was personal.
  • The car has a residual value when the lease company take it back. HMRC don’t care and certainly don’t knock that off your assumed BIK

*This is based on a flat rate of 28%. In reality the rate was lower in previous years but my decision to opt out has been based on rates and potential savings going forward, which will likely only get higher, not lower)

The Real Cost of a Company Car

Lease company prices are based on actual vehicle purchase costs (not full list price) and residual resale value. That is, your monthly lease cost is simply based on the depreciation (plus some profit obviously), yet, again, your BIK tax is based on full list price and takes no account of purchase discount or the fact the car is still worth maybe up to a third of its purchase price when you send it back. Therefore, in this example, say Lex managed to get the car for £34,000 and then sold it at auction for £9,000 3 years later. The lease cost over three years was roughly based on £25,000 depreciation. So in reality, the true benefit I have had over 3 years is 10% of £25,000, or £2,500. Yet I have been taxed on 84% of £36,000, or £30,240!! Now, remember, this is a company car which I need to do my job, 25,000 business miles per year. If that isn’t daylight robbery I don’t know what is.

How Much Can I save By Opting Out of My Company Car Scheme?

You bet you can but it does depend on what your company’s policy is and what their level of car allowance is compared to how much they will pay their own lease company.

In my case, my company’s lease limit for my grade is £650 per month. If I don’t use all that, I don’t get any form of refund although maybe potentially a lower tax bill if I go for a cheaper car (although not necessarily as lease costs are based residuals as well as purchase cost – you’ll get a much higher list value Mercedes than Jag or Alfa for the same monthly lease cost)

If I opt out my company gives me around £750 as they give me contribution towards car insurance (business insurance don’t forget if you are doing anything other than commuting to one place of work!) as they would for company car lease. That money is taxed at my highest rate, so in reality I get around £435 after tax and NI have been deducted. Now, you may say you don’t get much car for £435 per month? However, I’m now saving £336 in income tax because I don’t have a company car so have a total of £771 to spend, so far.

But That’s Not All

I say so far, as there is a further benefit. As you are now driving your own car you can claim back tax against your business miles at the rate of 45p for the first 10,000 miles and 25p thereafter. One important thing to remember here is that if you company give you a fuel card or other fuel benefit, you will need to deduct that. In my case my company uses the HMRC rates so I get 11p per mile benefit already for my business miles so I can only claim 34p and 14p respectively. There is some considerable debate that as your company is paying you car allowance you can’t claim mileage relief. This is wrong. If your company want to call it a car allowance so, unlike a payrise, they can easily change it later that’s up to them. As far as the tax man is concerned you are receiving fully taxed and NI’d income, like any other income, so it’s your car.

At 25,000 business miles a year, that stills works out at 10,000 x 34p = £3,400 plus 15,000 x 14p = £2,100 or £5,500 tax free, which at 40% saves me a further £2,200 per year or £183 per month.

This means I have £771 plus £183 or £984 per month to spend on a car.

The Saving and Conclusion

So with almost a grand per month to spend I went out to the lease companies. With my company scheme it had to be a new car, which was always considered by HMRC to be a BIK to me at full list price (including all the bits). Now with some control back in my hands I decided on pre-registered. I needed a reliable estate and with depreciation being the deciding factor in lease costs, the big brands are usually better value, so it was either Audi Avant, Merc C Class or BMW 3 Series Touring. The decision was entirely on price and in September I picked up a pre-registered (July 2018) BMW 320 M Sport touring with 7 miles on the clock for £598 per month. I obviously couldn’t spec it out myself or choose the colour but it has all the M Sport goodies with the addition of rear privacy glass and includes full maintenance, tyres, parts and road fund licence for 3 years up to 90,000 miles. I just have to pay for business insurance which is costing me around £40 per month.

So, I’m about £340 per month better off, £4,000 per year!!. The only potential downsides are:

  • It’s your insurance, which could get expensive if you have a few bumps
  • Minor car park dings will be charged to you when you hand the car back to the lease company, cheaper to fix them yourself first.
  • If you get made redundant or lose your job you will still have the lease to think about

Personally, I’m happy to take those risks. I put £200 per month into a car fund to pay for any minor scrapes that I wouldn’t want to harm my NCD over or are under my excess anyway. (don’t think these won’t happen, they always do in my experience, the world’s full of careless people)

Should you opt out?

So, should you opt out of your company car scheme? Only you can answer that question and it will depend on a number of factors. Your tax rate, car allowance, your attitude to risk and even your desire to do your deals with a leasing company. Do the sums and think about the saving against the risks. BIK is only going to increase, that Jag went from 16% BIK to 28% in just over 3 years! HMRC is already looking at hybrids, which in the main are nothing but a tax dodge for most real business use as they are measured in terms of CO2 output over the same distance as non hybrids which is clearly nonsense. If I had a company hybrid car, why would I charge it it with my own electricity? Most of my journeys are several hundred company miles and the average hybrid does 20-30 on electric max. So I’d be mostly using petrol/diesel with the added disadvantage of lugging an electric motor and very heavy batteries around.

Benefit in Kind Will Only Increase

The manufacturers have taken advantage of current regs and tax law to woo company car drivers to order hybrids. In some cases selling a hybrid version of a £20k car for £40k (Mitsubishi Outlander springs to mind – what a tinny pile of whatsit that is!) only because it’s attractive to company car drivers due to lower BIK rates. Any normal punter spending their own money wouldn’t touch one with a barge pole. Don’t think HMRC are going to let that carry on, just look at the real world emissions of any hybrid once the engine cuts in. They are all worse than any 2.0 litre diesel by a country mile, yet diesels have been branded as the spawn of Satan himself.

For me, taking control was a very simple decision.


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