Company Car Tax Explained
What is company car tax?
If a business provides its employees with a car for business and personal use, it will be subject to company car tax – as long as the employee in question earns more than £11,000 per year.
If you receive a car via a company car scheme, the benefit received in the form of the car you have use of is taxed as a benefit-in-kind (BiK).
What is BiK tax or benefit-in-kind tax?
Benefit-in-kind tax refers to a benefit (in this case, a company car) that employees get from their employer. However, that benefit is not included as part of the employees’ annual salary. BiK tax is essentially what is referred to as company car tax – it’s referred to as such because HMRC view the company car as a benefit outside of usual work equipment so you have to be taxed on that benefit.
How does company car tax work?
The amount of tax you pay on your company car will depend upon the vehicle you drive. The company car tax rate is calculated based on the carbon dioxide emissions and the type of fuel the car uses. It will also depend on the value of the car. Generally, the higher the CO2 emissions your company car emits and the higher the price of your car, the higher the benefit-in-kind tax will be.
To calculate your car benefit charge, you multiply the taxable list price of your vehicle (including accessories) by the relevant CO2 percentage (see guide here) and then multiple the result by your personal tax band. Please note that the value of any personal contributions you make should be deducted from the value of the taxable list price.
Company car models that are considered the least polluting will earn a five per cent BiK rate, whereas the highest polluting vehicles will be taxed at 37 per cent. From one tax year to the next, rates will change so check the Gov.uk site for current figures. From April 2015, electric vehicles are also taxed a BiK rate of five per cent, where previously they were exempt from company car tax.
How does fuel affect company car tax rates?
Diesel engines have a BiK rate higher than the equivalent CO2 petrol vehicle due to a 3% diesel supplement introduced in 2002 because of the higher amount of harmful pollutants diesel engines emitted. This was due to be removed in April 2016 due to improvements in diesel technology but has been delayed by the Chancellor.
This considered, you may also need to think about fuel efficiency before deciding on your company car. Will you cover enough miles in order to cover the additional cost of a diesel vehicle? Weigh up the pros and cons before deciding on a diesel company car, as it will affect the amount of benefit-in-kind tax you pay.
How does the price of the car factor into the rate of company car tax?
The P11D value of the car refers to the list price of the car as well as any additional costs incurred for optional extras and delivery. The P11D value is important because it is a large factor in how much company car tax you will pay for your vehicle. Physically, the P11D is a form that is filled out by employers and sent to HRMC along with details of their company car scheme.
This, combined with the evaluation of CO2 emissions, will dictate your tax rate. If you choose a basic model with no optional extras, this will have a direct effect on the P11D value.
Note: Company car tax rates are not based on the same category bandings as Vehicle Excise Duty.
What is a VED band?
Vehicle tax rates (Vehicle Excise Duty) are based on engine size, or fuel type and carbon dioxide (CO2) emissions, depending on when the vehicle was registered.
The rates are split into bands based on CO2 emissions – the lower the emissions, the lower the vehicle tax.
Although similar, company car tax rates are not based on the VED band system.
Current rates can be viewed here.
Are you an employer looking for further advice on the costs of company cars? We offer a complete range of fleet management services to support organisations that run a fleet vehicles. Get in touch with the team at CLM for expert advice on company car solutions.