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Explore how your company car affects your finances with the 1% rule – add 1% of the car's price to your salary for tax benefits.
Car allowance
In Germany, when people work as managers, salespeople, or technical support members, their employers often give them extra money to help with having a car. This extra money is considered part of their pay, but they have to pay taxes on it. The amount of money can be different for each person, ranging from EUR€400 to EUR€1,000 each month.
Employees can also talk with their bosses about getting a car from the company. This car can be used for work and personal things. But, it's like getting a valuable gift from the company, so they have to pay taxes and other fees for it.
What is the 1% rule?
The flat 1 percent rule is one of two ways to tax private trips with a company car.
Anyone who is also allowed to use their company car privately has an advantage over other employees who are not provided with a vehicle by their employer. And this advantage must be taxed. This can be done, for example, via the 1 percent rule.
The 1% rule, which is also called the list price method, says that 1% of the car's price is added to your monthly salary for taxes. This makes your salary seem higher, so you pay more income tax. Because of this, your take-home pay gets a bit smaller each month.
This means that with a gross list price of 27,000 euros for a car, for example, 270 euros "more" in salary is taxed every month. In addition, there is a tax of 0.03 percent of the gross domestic list price of the car per kilometer of distance between work and place of residence. For example, if you drive 15 kilometers to the office, you have to pay tax on a total of 0.45 percent of the gross list price per month as income. This covers all private trips such as vacation trips or trips home for lunch.
If the company car was imported from abroad and no domestic gross list price can be determined, this must be estimated. The gross sales price of the import dealer is to be used as a basis ( BFH ruling, file number III R 20/16 ).
How do I apply the 1% rule?
An example: The gross salary of an employee is 3,000 euros per month. Plus the 270 euros (1 percent of the new car value) from our example above, results in a gross tax of 3,270 euros. If you then add 121.50 euros for the kilometers driven, this leads to a gross tax of 3,391.50 euros.
If you pay usage fees or other additional payments (e.g. fuel costs) to your employer for the off-duty use of your company car, this makes the extra value of using the car a bit less.. This also applies when applying the 1% rule. This was decided by the Federal Fiscal Court (BFH) with two judgments dated November 30, 2016 ( file number VI R 2/15 and file number VI R 49/14 ).
And what about electric cars?
Since January 1, 2019, the monetary benefit has been set at one percent of half the list price. And since January 1, 2020, it has become cheaper again, because since then there has been a 0.25% rule for "pure" electric vehicles.
Are there other exceptions?
If you drive your company car to work less than 15 days a month, you only need to think about 0.002% for each kilometer you drive. You must be able to provide the tax office with proof of your actual working days per month.
So the shorter your commute to work and the less your company car costs, the lower the taxes for you. Incidentally, if you get a used car: The 1 percent is always calculated on the new car list price of a car.
At ConsultingHouse, we specialize in providing comprehensive payroll services. Our team can guide you through the application of this rule, ensuring accurate calculations. We can help you understand and apply this rule correctly. We're also familiar with exceptions, like lower taxes for short work trips and special rules for electric cars.
