Introduction to this document

Company car lump sum contribution agreement

If you wish an employee to contribute towards the purchase price of a company car, it’s a good idea to formalise the arrangement. This will reduce the taxable benefit in kind for the car.

Capital contribution

A capital contribution can be made by a director or employee towards the cost of either the car itself or any of the accessories which are taken into account in determining its price for taxable benefit purposes. The capital contribution is deducted from the list price of the car when calculating the taxable benefit.

Example. If the car attracts a tax charge of 24% per year, then making a capital contribution of £5,000 will save them tax on £1,200 (£5,000 x 24%) p.a. If they are a higher rate taxpayer, they would save £480 p.a. (40% x £1,200). If they are an additional rate taxpayer, they will save £540 (45% x £1,200) p.a.

Maximum contribution

There is a ceiling of £5,000 on the amount of any capital contribution which may be taken into account for these purposes.

On or before provision of the car

HMRC expects the payment to be made on or before the provision of the car or it may try to argue that a later payment relates to a contribution towards private use instead, which means it will only be set against the taxable benefit in the year the payment is made and not subsequent years.

Contribution agreement

So while there’s no requirement for the lump sum contribution to be written into the company car agreement, it’s good practice to make it contractual as this provides evidence that the payment relates to provision of the car.

What happens when the car is sold/exchanged?

The money the employee has paid should be refundable after their share of the depreciation in market value since purchase has been taken into account.