You can make the company car tax system work to your benefit

WITH petrol prices soaring, hard-pressed motorists are searching for new ways of cutting the costs of driving. Among these, for drivers who use company cars, are several ways of reducing those growing costs by taking advantage of tax reliefs.

Company car users are aggrieved that the allowance set by HM Revenue & Customs for business travel by members of the public has been frozen at 40p a mile since 2002, despite the AA's recent calculation that the true cost of running a car is at least 59.4p per mile.

But by taking the relevant measures it's still possible to benefit from tax efficiencies on company cars.

While the 40p per mile allowance may not be as valuable as it used to be – to the extent that many do not bother claiming it – it will become more valuable again for many drivers as motoring costs rise. However, detailed records must be kept, or else HMRC may not accept your claim.

You could also consider making a "capital contribution" to your company car. If your company provides you with a car, this is considered a "benefit in kind" and so is taxable. But by making a capital contribution of up to £5,000 – i.e. a cash payment – towards a company car, you get a percentage ownership of the car that will help reduce your annual tax bill.

Increasingly, the best ways of accessing the tax reliefs associated with running a company car are environmentally-driven. For instance, company cars with low emissions qualify for a lower benefit-in-kind charge. This can be beneficial both for those who own their own companies and those who are provided with a car by their employer. If the emissions are less than 111 grams per kilometre, the benefit in kind charge is only 10 per cent of the car's value. This charge rises steadily up to 35 per cent of the list price of the car at new for the most polluting models. However, there is no reduction if you either negotiated a discount on the list price or if the car was second-hand when you bought it.

Bear in mind that taxable benefit-in-kind charges for both the use of the car and for fuel provided by the company are calculated by reference to the car's emissions. As benefit-in-kind charges include both income tax and employer national insurance contributions, both the employee and the company are involved, creating a potential double-whammy.

It is therefore doubly important if you own the company that is providing the car and the fuel. The difference in the sum taxable between the cleanest cars and those at the top end of the pollution scale can run to thousands of pounds each year.

Owners of family companies have even more to gain by going green. If you own and run a family company, note that relief on the cost of the car is given to the company by way of capital allowances. On a low emission car (one where the emission is under 111g per km) the company will qualify for a 100 per cent relief for the year in which the car is purchased, whereas for a more polluting car the relief is restricted to 25 per cent up to a maximum of £3,000. Therefore if your company were to spend, say, £19,000 on a low-emission car, the first year relief would be for the full £19,000, compared to only £3,000 on a more polluting car costing exactly the same. The cleaner car attracts an initial relief over six times greater than the other.

There are other measures that can help you save tax costs, such as buying your family cars through your business. Business owners may shy away from this idea, as it raises the spectre of a large benefit-in-kind tax. That can often be the case, but with a degree of compromise as to the cost and type of car involved, you can significantly minimise the benefit in kind paid.

For instance, if you use your business to buy your daughter a company car costing £10,000, rather than paying for it out of your personal earnings, you would pay just £1,000 a year benefit in kind.

And if you are a 40 per cent tax payer, the true cash cost to you will be only £400 a year. This charge covers all expenses paid by the company other than fuel. It specifically includes motor insurance and, taking into account the cost of insurance premiums for your "inexperienced driver" daughter with no no-claims bonuses, you would be well in pocket on this item alone. The even better news is that your company will be able to claim full corporation tax relief for the costs against its corporation tax bill.

• Ronnie Ludwig is a partner in the Saffery Champness private wealth group.