When a company you work with gives you a car to use, even if the company is your own Private Limited Company, tax is payable by you as an individual. The Revenue Commissioners state you have access to a benefit you didn’t pay for, and they attach a value to that benefit. Then they tax you on that value. This value is called ‘Benefit in Kind’ or BIK for short.
BIK applies to other benefits too such as accommodation, gym memberships, etc.
When calculating tax, any money you personally pay towards the running of a company car can help you pay less tax. Let’s look at how it all stacks up.
Let’s assume your company car cost €45,000 when purchased new.
Let’s also assume the company will pay for everything to do with the company car. This means the tax, fuel, servicing, car valeting, insurance… everything.
The starting point for calculating Benefit in Kind on regular petrol/diesel/hybrid passenger cars is 30% of the ‘Original Market Value’ or OMV for short, of the car.
In simple terms, if a company gives you a car which was valued at €30,000 when it was new, the BIK is calculated as €45,000 x 30% = €13,500.
The value of that benefit to you in a full year is deemed to be €13,500. If you’re a higher tax payer (earning over €40,000), then you will pay tax of 52% on this (40% income tax, 4% PRSI and up to 8% USC). €13,500 x 52% = €7,020 tax payable each year on your company car (or €585 each month).
So if you buy a car for €45,000 and the insurance, tax, servicing, loan repayments and fuel costs are likely to be greater than €13,500 in a full year, it would make more sense to buy your car through your company as you’ll save tax.
The amount of the saving will be the tax amount on the difference between the actual running costs and the BIK on the OMV. For example, let’s say the running costs each year were €10,000, and BIK tax was €7,020, then the tax saving is €10,000 – €7,020 = €2,980.
If your regular petrol/diesel/hybrid car running costs each year are less than the Tax on the Benefit in Kind on the Original Market Value of the, then there is no tax saving to be had when buying this kind of passenger car through your company (however if you drive a lot for a living, there may be an advantage – see Savings #6 below)
If you buy an electric car in 2023, and its Original Market Value (i.e., cost when new) is less than €45,000, then there is no BIK.
If we take our example of a €50,000 company car, a regular petrol/diesel/hybrid car will give rise to a tax bill of €7,020. An electric car won’t give rise to any tax.
This essentially puts €585 back in your pocket every single month.
If you already own your own car and you trade this in as a deposit against the purchase of the electric car by the company, and let us say the trade in value is €10,000, then you can take this €10,000 tax free out of the company.
Get in on this electric car deal soon! The €50,000 limit on the value of the car reduces as follows over the next 2 years:
2024 €20,000
2025 €10,000
2026 €0
Great. Let’s say it cost €35,000 new but is currently worth €20,000. What you could do now is sell the car to your company and take €20,000 out of the company. There’s no tax on this as it is the sale of a private car.
The company can now pay all the running costs. Let’s say conservatively that these are €2,500 a year. To earn €2,500 after tax, the company needs to pay you a salary of €5,000. So rather than paying you €5000, the company just pays the running costs of the car directly which are €2,500. That means there’s an extra €2,500 left in the company that wouldn’t have been there before.
If you take that as salary, you’ll pay tax of roughly €1,300, leaving an additional €1,200 in your pocket that you didn’t have previously. PLUS, the €20,000 the company pays you for the car. The only other way to take this €20,000 out of the company is as salary. In both cases, after tax, you’d only be left with about €9,600.
While the BIK on a passenger vehicle is 30% of the OMV, the BIK on a commercial vehicle is just 8%. So if electric isn’t for you, and you’re a 2 car household and maybe one of the cars doesn’t need to be a regular passenger car, then maybe a commercial vehicle might help you save tax.
Just a point to note, the ‘crew cabs’ are classed as commercial vehicles for insurance and road tax reasons, but they are passenger vehicles for BIK calculations, so the 30% rate applies rather than the standard 8% rate for commercial vehicles. This wasn’t always the case, but when lots of people started buying crew cabs as their family car to sidestep the 30% BIK rate, the rules changed.
However, as you are buying a commercial vehicle, in most cases you can claim the VAT back so factor this into your decision making.
Remember that when buying a car, even a second-hand car, the Benefit In Kind is always calculated on the Original Market Value. If you buy a second-hand car for €10,000, and that car cost €30,000 new, you’ll be taxed on the €30,000 figure.
However, that can work in your favour if you buy a classic car. A 1964 original model Porsche 911 costs over €60,000 but the original market value was about €6,000. So, your tax would be 30% of €6,000 or €1,800!
If you travel a lot of business miles for work, and your company car is a regular petrol/diesel/hybrid, then the 30% BIK rate can be reduced. This link will show you the relevant percentages depending on how much business mileage you do each year. Travelling over 48,001km per year will reduce your BIK rate to 6%!
If paying less tax thanks to your car appeals to you, perhaps it’s time to switch to a Private Limited Company. It’s quick and easy to set up your own company with Contracting PLUS. We do all the work for you so you can concentrate on what really matters to you.
As Ireland’s leading accountants for Contractors, we know lots of ways you can pay less tax, maximise your income and save for the future.
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