Company car tax: everything you need to know

Everything an employer needs to know when offering a company car to an employee

 
Many large firms in the UK offer their employees a company car as a way to win and reward loyalty. Employers lease vehicles from car leasing firms and offer them as a bonus to their dedicated staff.

A company car is considered a perk of the job, however, the UK government considers it a type of income and therefore taxable.

Company car tax: everything you need to know

Company car tax – everything you need to know © Copyright David Dixon and licensed for reuse under this Creative Commons Licence

 

What is company car tax?

If you take advantage of a company car for work and personal use, Her Majesty’s Revenue and Customs (HMRC) will deduct money from your salary on a monthly/weekly basis.

A company car is officially considered a ‘Benefit in Kind’ (BIK), as the government claims that employees benefit financially from the perk, which is paid for by an employer.

How is the company car tax calculated?

Working out how much you will be taxed for the luxury of a company car is quite complex at first glance, but we can help you figure out the numbers.

Company car tax is different to Vehicle Excise Duty (VED) car tax, which is calculated purely based on the CO2 emissions of the vehicle being taxed.

While CO2 emissions are of course vital for working out company car tax, other factors also come into play, such as the vehicle’s recommended retail price (RRP) and your annual income and income tax rate.

What do I need to work the tax out?

To calculate your company car tax, follow these steps:

1. Find out your company car’s P11D value. This is based on the RRP of the car, including VAT and delivery costs (but excludes registration fees or the first year’s annual road tax). Your employer will have this information.

2. Once this has been sorted, you will need to consult the company car tax bands for the tax year in question. The tax bands are dependent upon the CO2 emissions of your car.

3. Find out your tax rate for you annual income. This will be either 20% or 40%.

To figure out your company car tax, use the following calculation:

P11D value x CO2 band classification = Benefits In Kind x tax rate = company car tax to pay

Example:

£15,000 (P11D value) x 15% (CO2 band) = 2,250 (BIK) x 20 (tax rate) = 450 (tax to pay)

Important Considerations

Here we have compiled a list of some important rules to consider:

  • Company car tax will be cheaper if it is used only part-time and/or if you pay an amount towards the cost of the car.
  • Diesel vehicles have a 3% surtax as they produce more harmful pollutants.
  • The company car tax bands change on a yearly basis.
  • Electric vehicles and low-emissions vehicles are not exempt.

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