Your Guide to Company Car Tax

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

Employer provided cars of all types remain one of the most popular benefits in the UK but the rules around tax can be confusing. Whether you’re in a traditional company car scheme, have the option of a cash allowance, or are part of an alternative scheme such as salary sacrifice, it’s important to know exactly how much you’ll pay depending on the car that you choose.

This guide will take you through the latest tax rules and show you how to calculate the cost to you. If you can’t find the answer you’re looking for we’ll do our best to help, contact us to discuss further.

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Company car drivers

For those that drive a traditional company car, with no cash alternative, the rules are relatively straightforward. However, in selecting a new vehicle it is important to understand the financial impact of your choice of car.

There are currently 29 Benefit in Kind (BiK) tax bands based on the CO2 emissions of the car. In general terms BiK tax rates increase by 3% or 4% within each CO2 band from tax year 2018/19 to 2019/20.

For drivers of diesel cars there’s also a supplementary charge which, for tax year 2018/19, has increased from 3% to 4% of the P11D value of the car. The good news is that if you drive a modern, clean diesel that passes the new RDE2-certification for nitrogen oxide emissions, the supplement doesn’t apply.

The maximum BiK rate for company cars is 37% of the vehicle’s P11D value. By 2019/20 this rate is reached at just 165g/km for petrol cars and 145g/km for diesels.

Click here for the full BiK tax rates tables to 2020/21

Calculating your company car tax

The amount of company car or Benefit in Kind (BiK) 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 cash allowance and car salary sacrifice scheme rules below.

Calculating company car BiK tax 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 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 19% of its value in the 2019/20 tax year.
  • A diesel car emitting between 125 grams and 129 grams of CO2 per kilometre will be taxed on 33% of its value in the 2019/20 tax year.

The proportion of a car’s value that can be taxed ranges from 16% for the lowest and 37% for the highest CO2 emitting cars in the 2019/20 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 4% additional rate for diesel cars not meeting the RED2 standard. Click here for the full BiK tax rates tables to 2020/21

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 2018/19 are as follows:
• Basic Rate tax payers – Up to £34,500 – 20%
• Higher Rate tax payers – £34,501 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 on tax bands visit the HMRC website.

4. Personal contributions and availability of the car

If you make a one-off contribution to the cost of the 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 examples show 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.

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 values) 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 closed the gap on diesel in recent years and you now also have a wide choice of alternative fuelled cars: petrol or diesel hybrids, plug-in hybrids and pure electric cars.

Pure electric cars have the lowest fuel costs but do not yet offer the convenience of rapid refuelling or range offered by conventional drivetrains. Petrol and diesel hybrids use supplementary batteries and electric motors to improve the overall efficiency of their internal combustion engines and these are becoming increasingly common on company car choice lists.

Plug-in hybrids offer the opportunity to travel a certain distance on battery power alone, with the knowledge that you also have a conventional engine to take over beyond that range. These too have become popular as company cars as their high fuel efficiency and low CO2 emissions mean lower BiK bills.

For example, the MINI Countryman S E plug-in hybrid has an official combined consumption figure of 113.0-117.7 mpg and a CO2 rating of just 55-56 g/km. However, these figures are only achievable if the car’s batteries are frequently charged and it is driven, when possible, in electric only mode. Failure to use the car in this way can lead to very poor fuel consumption due to the extra weight of the electric drivetrain.

It’s also worth noting that from the 2020/21 tax year BiK rates for pure electric and plug-in hybrid cars drop considerably, depending on the distance that they can travel on battery power alone. A petrol plug-in hybrid capable of 50 miles electric driving, and with CO2 emissions of 50g/km or less, attracts a BiK rate of 13% in 2018/19, 16% in 2019/20 but just 8% in 2020/21.

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 2018/19 tax year this is £23,400.

Here’s an example:

  • VW Golf SE 1.0TSI 115PS 6 Speed Manual 3 door
  • £23,400 x CO2 Emissions % x Income Tax Rate = Annual Fuel Benefit Tax
  • £23,400 x 25% x 20% = £1,170 Annual Fuel Benefit Tax

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

Tax rules for company cars where a cash alternative is offered

From 6 April 2017 the rules changed for drivers who have the choice of a company car or a cash alternative. Previously, drivers who had this choice and chose to take a company car were taxed on the Benefit in Kind (BiK) value of their car.

For drivers who ordered 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, this includes taking delivery of a new company car.

Other drivers are now 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 as they may have to pay income tax on the full amount of their cash alternative.

Drivers choosing an Ultra-Low Emission Vehicle (ULEV – cars emitting 75g/km CO2 or less) after 6 April 2017 are also be exempt from the tax changes. To learn more about the tax advantages of running a ULEV click here.

So, in summary:

  • Company 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 £20,000, the tax for 2018/19 would currently be due at your highest tax rate on £5,000 (list price of £20,000 x 25%). If your marginal rate of tax was 40% you’d end up paying £2,000 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 £6,000, under the new rules this would be taxed rather than the £5,000. So the tax you’d actually pay would be £2,400 rather than £2,000.

However, if your cash allowance was just £4,000 the tax you’d pay would be calculated on the £5,000 as in the first part of the example.

Tax rules for car salary sacrifice schemes

Prior to 6 April 2017, drivers who participated in a salary sacrifice scheme to take a company car were taxed on the Benefit in Kind (BiK) value of their car and, depending on the choice of vehicle, were able to make income tax savings by paying for the car out of their gross salary.

Since then, with the exception of Ultra Low Emission Vehicles, drivers have been 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 who ordered 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, this includes taking delivery of a new company car.

Drivers choosing an Ultra-Low Emission Vehicle (ULEV – cars emitting 75g/km CO2 or less) after 6 April 2017 are also be exempt from the tax changes. To learn more about the tax advantages of running a ULEV click here.

In summary:

  • Salary sacrifice 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.

For more information read our FAQs.

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.

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