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Company car tax explained

You pay company car tax when your employer allows you or your family to use the company car outside of work. It’s considered a ‘perk’ provided by your employer and is treated as a Benefit-In-Kind (BIK) for tax purposes.

A company car is an enduring employee benefit and the tax rules imposed might seem like a riddle within a riddle.

Here’s a quick guide to help you make sense of company car tax and determine how much of a perk it truly is.

 

Company car tax terms: a quick jargon buster

Company car tax is littered with acronyms and industry jargon. Here's a quick rundown of some of the most commonly used terms:

  • Benefit-In-Kind (BIK) - any non-salary perk you get as an employee of a company, such as a company car
  • CO2 Emissions - the amount of carbon dioxide that a petrol, diesel or hybrid car produces. 
  • P11D value - the total value of the company car, including purchase price, VAT, delivery and any extras.
  • g/km - how CO2 emissions are measured. This is the number of grams of CO2 produced for every kilometre the car drives.
  • BIK rate - the percentage of a company car's value that is taxable. Generally, the higher the emissions, the higher the BIK rate.
 

What is a Benefit-In-Kind (BIK) tax?

BIK covers a range of perks that employers offer in addition to your salary. They cover a range of things such as:

  • Accommodation
  • Mileage allowance
  • Subscriptions to professional bodies
  • A company car
 

How does company car tax work?

Like all BIK, a company car is considered a non-cash benefit to an employee. You have to pay tax on it if your employer allows you to use it privately as well as for business purposes. The government sets out how it’s valued for the purposes of calculating tax.

You pay tax on the taxable value of the benefit, which in this case, is the company car. There are 2 ways employers do this:

  • Working out the cash equivalent of the benefit and adding it to the employees’ salaries. This is then taxed through payroll.

  • Using a P11D form.

 

What is a P11D?

It’s both a form and a value and they’re not the same. Your employer provides a P11D form by 6 July following the end of the tax year summarising the value of all your BIK. Then HMRC determines what's taxable based on this report.

When it comes to a company car, you have to determine the P11D value. It’s based on:

It’s used in the company car tax calculation to determine the annual car tax due for payment on business vehicles. Remember the higher the P11D value, the more tax you pay.

 

What’s included in company car tax calculation?

There is a handy company car tax calculator that gives the value of the company car benefit. This BIK calculator is based on:

  • The tax year

  • The vehicle’s approved CO2 emissions

  • Whether there’s a cash alternative

  • Its P11D value

  • List price (including VAT and accessories)

  • Employee capital contributions - what you pay towards the cost of the car/accessories

  • Fuel type

  • The date of registration

The approved level of CO2 emitted from the car's exhaust is required and is recorded on the type approval certificate. If your vehicle is registered after 1 March 2001, you can find this on the vehicle registration certificate (VSC) or find it at the Vehicle Certification Agency site.

The CO2 emissions figure that applies at the date of first registration is set for the life of the car.

 

How is company car tax calculated?

When you’re given a company car, the cash value of the car is added to your salary. A tax is then taken off the final sum. This could raise your rate of tax if you’re close to a tax threshold.

You don’t pay tax until you’re earning over £12,570. When you start earning more, the rest is basic rate tax of 20%.

Anything you earn over £50,271, gets a higher 40% tax rate. So, depending on your income, the list price of the car could push you into the next tax threshold.

The amount of tax you pay depends on:

  • The vehicle's CO2 emissions

  • The make and model of vehicle

  • List price (plus accessories, less capital contribution)

  • What type of fuel it takes

  • How often you use the vehicle

The CO2 emissions are calculated using an appropriate percentage. The official CO2 figure for the car (measured in grams per kilometre) is converted into a percentage multiplier, then applied to the list price. This establishes the taxable benefit charge for the year.

 

Company car tax BIK rate bands

You need to know the company car tax band for the calculation of the company car tax. You can find the government company car tax rates at GOV.UK

The incentive towards a greener approach to road strategy is clear as pure electric cars with zero tailpipe emissions should be taxed at 2%. 

The table below illustrates the BIK tax bands based on the CO2 emissions of your vehicle for the current tax year.

Non-electric cars for the tax year 2022 to 2023

CO2 emissions g/km Electric mileage range NEDC* % WLTP** %
0
2
2
1 to 50
130 and above
2 2
1 to 50
70 to 129
5 5
1 to 50
40 to 69
8 8
1 to 50
30 to 39
12 12
1 to 50
less than 30
14 14
51 to 54
15 15
55 to 59
16 16
60 to 64
17 17
65 to 69
18 18
70 to 74
19
19
75 to 79
20
20
80 to 84
21
21
85 to 89
22
22
90 to 94
23
23
95 to 99
24
24
100 to 104
25
25
105 to 109
26
26
110 to 114
27
27
115 to 119
28
28
120 to 124
29
29
125 to 129
30
30
130 to 134
31
31
135 to 139
32
32
140 to 144
33
33
145 to 149
34
34
150 to 154
35
35
155 to 159
36
36
160 to 164
37
37
165 to 169
37
38
170 and above
37
39

*New European Driving Cycle 

**Worldwide Light Vehicle Test Procedure

 

How much will I need to pay on my company car tax?

You can follow the steps to the government’s method of calculating company car benefit, which is modified for older classic cars and for disabled drivers.

But if you want a rough idea of how much you might pay in company car tax:

  • Find your company car's P11D value. That's the cost of the car, delivery charges and first year's car tax.
  • Multiply the P11D by your car's BIK tax rate.
  • Multiply the result by your income tax percentage.

Here's an example:

Let's say you have a company car whose P11D value comes to £25,000 altogether.

And we'll say that this particular car's emissions is about the European average of 127g/km, so its BIK tax rate is 29% (using the WLTP figures).

The taxable amount on that car would be £25,000 x 27% = £6,750.

 

How can I reduce my company car tax?

There are a number of ways to reduce your company car tax such as getting a car that has a lower P11D value.

Another way is to get a car with lower CO2 emissions. This might have the added benefit of being more cost effective due its environmentally friendly status giving it a lower BIK tax rate.        

A full electric vehicle might not be a viable option for everyone but hybrid electric vehicles provides a similar benefit of lower company car taxation.

Fleet Alliance recommends taking advantage with some of the best electric and hybrid models including a Vauxhall Corsa-e, Kia e-Niro and Tesla.

One concern with electric cars is the relatively high initial cost. But there are ways to make buying an electric car more affordable.

 

 

How much tax will I pay for having a company van?

Unlike with company cars, company vans pay tax at a fixed rate. For more information, check out our guide to car and van tax bands.

The 2022/2023 BIK tax rate for company vans is set at £3,500. The amount you pay depends on your income tax bracket. So, if you pay 20% income tax, you pay £3,500 * 20% = £700.

If you don't use the van for personal use, or if you're a sole trader, you don't normally need to pay company van tax.

 

Can I use my own car as a company car?

Yes you can. If you use your car for work purposes beyond driving to and from work, you might be able to claim for the fuel you use. The amount you could claim back depends on how many miles you drive and what vehicle you're using:

Vehicle type First 10,000 miles Above 10,000 miles
Cars and vans
45p 25p
Motorcycles 24p 24p

But don't forget that, as it's still your car, you have to pay for car insurance, maintenance and regular servicing. It might also be worth considering business car insurance if you're using your own car for business purposes and are on the road a lot.

Compare car insurance quotes

 

What about company car fuel?

Some employers might also pay for your fuel, both for business and personal use. This might be considered a 'taxable benefit' in the same way that a company car would. 

To work out how much tax you might need to pay, you multiply your BIK tax rate by a flat amount set by HMRC. For tax year 2022/23, this is set at £24,600.

So, if your company car had the highest BIK tax rate of 37%, the taxable amount would be on £9,102 of 'free' fuel. If your income tax is set at 20%, you might expect to pay around £1,800 in tax on that fuel.

Depending on how much you actually drive each year, it could work out more expensive to have your company pay for your fuel.