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Business Doctor: I’d prefer a new car to a hefty dividend

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KK writes: I run a company that has a significant bank balance after a number of years of good trading. I’ve considered paying dividends but, given the increase in tax rates, I’m reluctant to do so. I need to replace my car, which could be done through the company to use some of the surplus cash. I have been quoted £65,000 for a new car with diesel CO2 emissions of 135g/km. How should I proceed?

If the company buys the car and you drive it for personal as well as business use, you will have an annual benefit-in-kind charge based on the emissions and the list price, including any accessories, writes Jon Dawson, partner at Kingston Smith LLP. The company will, however, assume the risk of owning the vehicle and be responsible for looking after it.

You would be taxed on a benefit calculated as 27% of £65,000 in the current year. For a 40% taxpayer, this would mean additional income tax of £7,020 a year and the company would pay £2,421 in extra national insurance. The benefit rates are scheduled to increase — to 34% for this vehicle by 2019-20. An additional benefit would arise if the company paid for private fuel.

Despite the increase in dividend tax rates, you could be better off buying the car personally. You would need to take a dividend higher than £65,000 to cover your personal tax charge but the company would not incur national insurance. This would give rise to a larger one-off tax liability, rather than an annual taxable benefit.