Can you afford a company car? It all depends, explains, Kieran Fagan - on the car's price, how many business miles you'll be doing, and a few other factors
It's that time again. The company is renewing its fleet. Maybe you've been promoted and for the first time you're looking forward to getting your hands on the keys of a shiny new Ford, Toyota, Nissan or even BMW all paid for - tax, insurance, fuel - all free gratis and for nothing.
The question is - can you afford it? The problem is the Revenue Commissioners don't like PAYE employees getting benefits in kind (BIK) tax free - that's to say pay which doesn't look like pay because it has four wheels and shiny door handles. And, unless you really need a car for work and can prove it, your car, your BIK, is going to be taxed . . . and heavily.
How heavily? In round terms, on a car costing €20,000 new, something between €220 and €240 a month will vanish out of your pay packet. That's because many of the people who get company cars don't do the business mileage to justify them.
This is based on a back-of-the-envelope calculation - there are more precise figures in our table. In outline, if your car costs €20,000 new, you will be taxed as if €6,000 - or 30 per cent - is payment in cash. (If business mileage exceeds 15,000 a year this falls to between 24 per cent and 6 per cent, as the table shows.
Most people getting company cars also pay tax at the top rate of 42 per cent with PRSI of 4 per cent and health contribution of 2 per cent, so many of you are looking at paying extra tax of between 44 per cent and 48 per cent of €6,000.
If you pay tax at the lower rate of 20 per cent, the tax penalty is almost halved, but few people who get company cars as perks are - or if they are, remain long on that rate.
So, what about one of those vans? Don't they look nearly the same as the four-wheel-drives, and you don't pay BIK tax on them? True, but you are not permitted "auxiliary private use". That includes the weekend shopping. There are other conditions on BIK exemption for vans.
BIK tax is based on original market values - in Ireland, so there's no advantage in buying a high-spec car cheaper overseas and claiming the original price in its home market as the market value. Tax is levied on what that car, and its extras, would have cost on the Irish market. It's called Catch 26 (counties)!
The only relief is for genuine business mileage, and the effective threshold is 15,000 miles. We have to clock up more than 15,000 miles on business and be able to prove it. If an employee simply uses a car to drive from home to a workplace and back again in the evening, Revenue doesn't regard this as business use.
Since the greater Dublin area now reaches almost to the Shannon, discussion of average mileage is near meaningless, but it used to be that a typical family car with some business use did about 12,000 miles a year. You need to use your car for getting out and about to visit clients, sites, whatever, and have complete records to prove it.
Those with mileage below 15,000 who spend 70 per cent of their time away from home can claim a reduction of 20 per cent. As the table shows the tax rate tapers down to 6 per cent for those running up in excess of 30,000 miles a year. This clearly favours the genuine business user.
Those who have the resources and the patience might like to note that the BIK tax kind for veteran cars supplied by the employer is based on 30 per cent of original market value when the car was first registered in Ireland. There's a potential saving there, but it must be balanced against the difficulty of getting your boss to sign up for buying you a 1930s bull-nose Morris Oxford, and the cost of providing another car in case you really need to be sure of getting to your destination.
So, if you don't do enough business mileage, can you afford a company car? The answer is yes. The extra tax of around €220 to €240 a month you pay on a €20,000 car is less than the cost of financing that amount over three years, which comes out at about €320 a month.
On the plus side, tax and insurance are paid - and you have no worries if the clutch fails or the engine blows up or you need new tyres just after Christmas.
On the debit side, the car will never be yours, but cars are for use - they were never a great store of value. However, if you decide to go for the biggest, fanciest boy racer in the dealer's lot, or load your Averagemobile with catalogues-full of extras, remember the more the car costs the more tax you pay.
What is an economic boon at €20,000 can turn into an expensive millstone at €40,000 when your monthly pay check takes a hit of around €450 plus.
To see the Revenue Commissioners' guide to BIK go to www.revenue.ie/pdf/bikguide.pdf