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06 Jul 2021
Adam Bate Claire Hunte

A guide to company car tax

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Hands of the wheel of a car driving down a sunny road

We look at company car tax and how it can affect the tax you pay

Company car tax is levied 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 unfortunately the tax rules imposed can 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.

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

BIK covers a range of additional perks that employers offer in addition to your salary. They cover a range of things such as: accommodation, mileage allowance, subscriptions to professional bodies and, of course, 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 two ways employers can do this:

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

  2. 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. The 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:

  • the car’s list price including VAT

  • delivery charges minus the registration

  • the first year’s car tax

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’ll pay.

 

What’s included in company car tax calculation?

There is a handy company car benefit calculator which gives the value of the company car benefit. The online calculation is based on:

  • the tax year

  • vehicle’s approved CO2 emissions

  • whether there’s a cash alternative

  • 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. Unfortunately, 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 £10,600. When you start earning more, the rest is basic rate tax of 20%.

If you’re earning over £42,385, you’ll pay at 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 following:

  • the vehicles 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.

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.

 

Company car tax bands

You’ll need to know the company car tax band for the calculation of the company car tax calculation. 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 vehicles with zero tailpipe emissions will be taxed at 0% paying no BIK rate. This increases to 1% in 2021/22 and 2% in 2022/23.

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

Petrol-powered and hybrid-powered cars for the tax year 2021 to 2022

CO2 emissions g/km

Electric mileage range

NEDC* %

WLTP** %

0

1

1

1 to 50

130 and above

2

1

1 to 50

70 to 129

5

4

1 to 50

40 to 69

8

7

1 to 50

30 to 39

12

11

1 to 50

less than 30

14

13

51 to 54

15

14

55 to 59

16

15

60 to 64

17

1

65 to 69

18

17

70 to 74

19

18

75 to 79

20

19

80 to 84

21

20

85 to 89

22

21

90 to 94

23

22

95 to 99

24

23

100 to 104

25

24

105 to 109

26

25

110 to 114

27

26

115 to 119

28

27

120 to 124

29

28

125 to 129

30

29

130 to 134

31

30

135 to 139

32

31

140 to 144

33

32

145 to 149

34

33

150 to 154

35

34

155 to 159

36

35

160 to 164

37

36

165 to 169

37

37

170 and above

37

37

*New European Driving Cycle 

**Worldwide Light Vehicle Test Procedure

 

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 less P11D value.

Another way is to get a car with lower CO2 emission.This'll have the added benefit of being more cost effective due to the exemption and it’s environmentally friendly.        

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

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

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