About to order your next company car? Read this first.

There’s a lot happening in the world of company cars. Not only are company car tax rates continuing to increase but there’s now a completely new set of rules for drivers of ‘salary sacrifice’ cars and those with the choice of a car or a cash allowance.

What do these changes mean for you?

We have put together some information that will explain the latest rules and help you make the right decision for your circumstances. If you can’t find the answer you’re looking for we’ll do our best to help, contact us to discuss further.

Understanding company car tax and the changes from April 2017

Put simply, if you have an existing company car, salary sacrifice car, or have chosen a car rather than cash, nothing will change until 5 April 2021 or until you order a new car under the scheme. The rules are also unchanged if you order a new car before 6 April 2017.

If you do order a new car on or after 6 April 2017 the new rules will apply.

There are three main areas to be considered; click on the relevant link below to read more about how you might be impacted:

 

>I have the option to take a company car or a cash allowance

>I intend to take a car under a salary sacrifice arrangement

>I get a company car with no cash alternative


 

Changes to rules around company cars and cash alternatives

From 6 April 2017 the rules change for drivers who have the choice of a company car or a cash alternative.

Currently, drivers who have this choice and take a company car are taxed on the Benefit in Kind (BiK) value of their car.

Moving forwards, drivers will be taxed either on the BiK value of their car or on the value of their cash alternative, whichever is higher.

This means that drivers who select a car with a low P11D value and/or a car with low CO2 emissions may no longer benefit from a reduced tax bill.

They will pay income tax on the full amount of their cash alternative.

For drivers of existing cars, or those ordering a new car before 6 April 2017, the existing tax arrangements stay in place until 5 April 2021 or until a ‘change in arrangements’ has taken place.

Drivers choosing an Ultra Low Emission Vehicle (ULEV – cars emitting 75g/km CO2 or less) after 6 April 2017 will also be exempt from the tax changes.

So, in summary:

  • Existing vehicle or new car ordered before 6 April 2017 – no change until 5 April 2021 or upon replacement
  • Ultra Low Emission Vehicle – no change
  • Cash allowance option and take cash instead of car – no change
  • Cash allowance option and take car – change – you will be taxed on whichever is the higher of these two amounts: the amount of your cash allowance or the Benefit in Kind value of your car.

 

Cash allowance change example

For a petrol car emitting 120 g/km with a P11D value of £15,000, the tax for 2016/17 would currently be due at your highest tax rate on £3,150 (list price of £15,000 x 21%). If your marginal rate of tax was 40% you’d end up paying £1,260 in tax. Your employer would also pay class 1A NIC on the same value.

If you had the option of taking a cash alternative of £4,000, under the new rules this would be taxed rather than the £3,150. So the tax you’d actually pay would go up from £1,260 to £1,600.

However, if the cash allowance was £3,000 the tax you’d pay would be calculated on the £3,150 as before.


 

Changes to rules around car salary sacrifice schemes

From 6 April 2017, the rules change for employees who take a company car via a car salary sacrifice scheme.

Currently, drivers who participate in a salary sacrifice scheme to take a company car are taxed on the Benefit in Kind (BiK) value of their car and, depending on the choice of vehicle, are able to make income tax savings by paying for the car out of their gross salary.

With the exception of Ultra Low Emission Vehicles, this is set to change. From 6 April 2017, drivers will be taxed on the higher value of either the amount of cash forgone or the BiK value of the car.

This means that drivers who select a car with a low P11D value and/or a car with low CO2 emissions may no longer benefit from a reduced tax bill and will pay income tax on the full amount of the cash foregone.

For drivers of existing salary sacrifice scheme cars, or those ordering a new car before 6 April 2017, the existing tax arrangements stay in place until 5 April 2021 or until a ‘change in arrangements’ has taken place.

Drivers choosing an Ultra Low Emission Vehicle (ULEV – cars emitting 75g/km CO2 or less) after 6 April 2017 will also be exempt from the tax changes.

In summary:

  • Existing vehicle or new car ordered before 6 April 2017 – no change until 5 April 2021 or upon replacement
  • Ultra Low Emission Vehicle – no change
  • New salary sacrifice car ordered on or after 6 April 2017 – change – you will be taxed on whichever is the higher of these two amounts: the amount of cash sacrificed or the Benefit in Kind value of your car.
Car salary sacrifice change example

For a petrol car emitting 97 g/km with a P11D value of £14,475 for a 20% tax payer.

Under the pre 6 April 2017 rules, tax savings were possible. If the monthly vehicle payment was £299 which was paid for out of gross salary, this would result in an effective net vehicle cost to include tax savings of £249.75. The scheme provided a monthly saving of £52.25.

With the incoming changes, post 6 April 2017, these savings will no longer be possible on vehicles with CO2 emissions greater than 75g/km. The employee will be taxed on the amount of the cash sacrificed to pay for the vehicle or the BIK value of the car – whichever is the higher.

ULEVs are exempt from these new rules and salary sacrifice savings can still be made for these vehicles.


 

Company car drivers

For those that drive a company car with no cash alternative and not as part of a salary sacrifice scheme, the rules are unchanged. However, in selecting a new vehicle it is important to understand the financial impact of your choice of car.

For all cars, the existing 29 tax bands based on CO2 emissions remain in place and the familiar rise in company car BiK taxation continues from April 2017 to 2020. In general terms BiK tax rates increase by between 2% and 4% within each CO2 band year on year from 2017 to 2020. The 3% additional BiK tax rate for diesel vehicles remains unchanged.

By 2020 the maximum 37% rate is reached at just 165g/km for petrol cars and 150g/km for diesel. At the same date diesel ULEVs (producing between 51 – 75g/km CO2) will be taxed at 21% BiK.

Click here for the full table of 2017-2020 BiK tax rates.

Calculating your company car tax

The amount of company car tax you pay depends on the value of the car, its CO2 emissions, your personal tax rate and whether you forgo cash for the car either under a salary sacrifice scheme or as a cash allowance. Read more about changes to cash allowance and car salary sacrifice scheme rules above.

The key cost that you will need to consider is the Benefit in Kind (BiK) tax that you pay for using your company car. This can seem quite complicated but if you break it down into its components it’s easy to make sure that your choice of car fits your budget. The following section demonstrates how to calculate company car tax.

How much company car tax will I pay?

How much company car benefit in kind (BiK) tax you pay depends on four key criteria:

  1. The carbon dioxide (CO2) emissions per kilometre of your chosen car
  2. The value of the car when new, including any optional extras – this is known as the P11D value
  3. Whether you are a Basic, Higher or Additional Rate tax payer
  4. Whether you have access to the car all or some of the time and whether you make any personal contribution towards its cost

We’ll take a look at each of these in turn.

 

1. Carbon dioxide emissions

The Government (HMRC) uses CO2 emissions to decide what proportion of the car’s value is taxable. The more CO2 it emits per kilometre the higher the proportion of the car’s value is taxed.

For example:

  • A petrol car emitting between 51 grams and 75 grams of CO2 per kilometre will be taxed on 13% of its value in the 2017/18 tax year
  • A diesel car emitting between 125 grams and 129 grams of CO2 per kilometre will be taxed on 27% of its value in the 2017/18 tax year

In total there are 29 bands of CO2 emissions, with diesel cars having an additional 3% added within each band over petrol cars.

The proportion of a car’s value that can be taxed ranges from 9% for the lowest and 37% for the highest emitting cars in the 2017/18 tax year.

Each year HMRC revises the CO2 bands meaning that the company car tax you pay is likely to increase over the life of the car.

Here is a slice of the CO2 table to illustrate how the rates change over time. Also note the 3% additional rate for diesel cars. Click here for the full table of 2017-2020 BiK tax rates.

company car tax extract

 

So, by choosing a car with lower CO2 emissions you may be able make a significant difference to your company car tax bill.

For more information visit the HMRC website.

2. The value of the car (P11D value)

The next thing to consider is the value of the car itself.

P11D is actually the name of a form completed by employers and sent to HMRC to let them know about benefits employees have received. So the P11D value of a car is the value that is included on this form.

The P11D value of a car includes the list price, any factory fitted option, VAT, plus any delivery charges.

It does not include the car’s first registration fee or its annual vehicle tax (VED).

By choosing a vehicle with a lower list price, and by being selective in the number of options that you add, you can keep the P11D value down.

 

3. Your personal tax band

Another major factor in how much company car tax you will pay is your personal income tax band. The tax bands for 2017/18 are as follows:

    • Basic Rate tax payers – Up to £35,000 – 20%
    • Higher Rate tax payers – £35,000 to £150,000 – 40%
    • Additional Rate tax payers – Over £150,000 – 45%

The higher the rate of tax you pay the more BiK company car tax you will be liable for for any given car.

For more information of tax bands visit the HMRC website.

 

4. Personal contributions and availability of the car

If you make a contribution to the monthly lease costs of your company car this amount is deducted from the final BiK tax liability.

In the same way, any payments made to your employer for the private use of a company car are deducted from the BiK tax charge.

If you do not have access to your company car for a period of 30 consecutive days or more (for example, if your car is undergoing extensive repairs and you don’t take a replacement car) your BiK tax will be reduced in proportion to the amount of time you do not have use of it.

To find out more about how personal contributions and availability affect your tax liability visit HMRC’s Company Car Tax calculator.

Company car tax examples

The following example shows how the P11D value of the car, its CO2 emissions and the employee’s income tax rate are used to calculate the amount of Benefit in Kind (BiK) tax due.

Note that for drivers of salary sacrifice cars or those with a cash allowance alternative income tax may be payable on the cash value rather than company car benefit tax.

Example 1 – New Golf SE 1.0TSI 110PS Manual

  • P11D Value – £18,660
  • CO2 Emissions – 108g/km – 20% of P11D value is taxed
  • Employee’s income tax rate – Basic 20%

To calculate the company car tax we use the following formula:

P11D Value x BiK CO2 Rate = BiK Value

BiK Value x Tax Rate = Annual Company Car Tax

So in this example:

£18,660 x 20% = £3,732 (NB For cars ordered on or after 6 April 2017 if this figure is lower than the value of your annual cash alternative you will be charged income tax on that amount instead)

£3,732 x 20% = £746.40 Annual Company Car tax

Or £62.20 per month

Example 2 – Audi A4 Saloon Ultra TDI 190PS 6 Speed Manual

  • P11D Value – £31,995
  • CO2 Emissions – 102g/km – 22% of P11D value is taxed
  • Employee’s income tax rate – Basic 40%

To calculate the company car tax we use the following formula:

P11D Value x BiK CO2 Rate = BiK Value

BiK Value x Tax Rate = Annual Company Car Tax

So in this example:

£31,995 x 22% = £7,038.90 (NB For cars ordered on or after 6 April 2017 if this figure is lower than the value of your annual cash alternative you will be charged income tax on that amount instead)

£7,038.90 x 40% = £2,815.56 Annual Company Car tax

Or £234.63 per month

To use HMRC’s company car tax calculator click here.


 

Fuel costs and employer provided private fuel

Another important cost that you will need to consider when selecting a new car is fuelling it for your private journeys. By choosing a car with lower fuel consumption you can pay less frequent visits to the pumps. However, you’ll also need to take into account whether the value of the car is higher and whether the type of fuel is more expensive.

Fuel types

Traditionally, diesel cars have delivered more miles to the gallon but have also had higher list prices (and therefore P11D prices) than their petrol equivalents. Petrol and diesel fuel prices have also fluctuated, with diesel sometimes being the more expensive fuel.

Improving petrol engine technology has considerably closed the gap on diesel in recent years and you now also have a wide choice of alternative fuelled cars: petrol or diesel hybrids or pure electric cars.

The key criteria to consider is how many private miles you are likely to travel in your car each year. Use this calculator to input the details of one or more cars to see which delivers the best overall results for you.

Employer provided private fuel

Where an employer offers to provide you with free fuel for your private journeys you’ll need to calculate whether this benefit is greater than the extra BiK tax that you’ll have to pay. If you cover a lot of private miles it could be worth considering, if your private mileage is low it probably isn’t.

To calculate how much BiK tax you’ll pay on free private fuel you use a similar method to working out your company car tax but replace the value of the vehicle with the Fuel Benefit figure set by HMRC; for the 2017/18 tax year this is £22,600.

Here’s an example:

  • New Golf SE 1.0TSI 110PS Manual
  • £22,600 x CO2 Emissions % x Income Tax Rate = Annual Fuel Benefit Tax
  • £22,600 x 20% x 20% = £904 Annual Fuel Benefit Tax

Use this calculator to work out the break-even private mileage for cars you might be considering.


Choosing the right type of car for your mobility needs

There’s a bewildering choice of new cars on the market with a huge range of body styles, engine types and option packages available. It’s easy to get seduced by the ‘lifestyle’ promises of manufacturer adverts and lose touch with what you really need from your car.

We’ve put together a quick guide that should help you to focus on what’s most important to you and your family, from journey types to safety features to brand image. It also contains a handy checklist that could narrow your search. Read the guide here.

If you need any additional information to help make any decisions around your next car, please contact us.