Company car tax explained

A company car is a tax-efficient way of rewarding an existing employee, with 64% of company car drivers agreeing whether a company car is offered or not is considered an important factor when taking a new job. But, a company car doesn’t come for free, it is subject to tax, so what is company car tax and how do you work it out?

What are the tax benefits of leasing a car?

Briefly outline or bullet point the key tax benefits. Make sure to include the keywords:

  • car leasing tax benefits

and answer the question:

  • are car leasing payments tax-deductible

Company Car tax

So, if your employer has given you a car, one that you can use for both work and personal use, then in the eyes of HMRC that vehicle is deemed a ‘company car’ and, as such, a ‘taxable perk’.

When it comes to company cars, the amount of benefit-in-kind tax you’ll have to pay will depend on the list price of the vehicle. But it will also depend on the car’s CO2 emissions (in grams per kilometre), the type of fuel it uses as well as your income tax rate or band.

What is BIK Tax?

As an employee or company director, you may receive certain benefits from your company such as accommodation, a loan or a company car, etc. While some of these benefits are tax-free, you’ll need to pay taxes for using certain things like housing or a vehicle provided by your employer (if you’ve chosen to have these). The amount of tax, otherwise known as benefit-in-kind or BIK tax, that you end up paying on these ‘company perks’ will depend on a few different factors, including the value of the benefit.

Reducing your Company Car Tax

By this point, you’re probably wondering if there are ways to reduce your BIK payments or company car tax. Only using the vehicle part-time or making contributions to the fees are a couple of ways of doing so. However, there’s also the option of choosing an electric (EV) or low-emission vehicle as your company car. And that last choice is significant, given the changes that HMRC has in store for the 2020 tax year, changes that could have a substantial effect on the amount of company car tax you’ll need to pay.

Calculating Car Tax

Company Car Tax Changes Taking Effect on the 6th of April 2020

From the 6th of April, the beginning of the 2020 tax year, how BIK tax is calculated will be modified. That modification is designed to favour vehicles with lower or net-zero CO2 emissions, thus rewarding drivers who are making more of an effort to ‘go green’. Simply put, this means that cars with lower CO2 emissions will be taxed at a much lower rate than higher emitting vehicles. For drivers of vehicles that land in the 1-50 g/km of CO2 bracket, that means a drop in tax rate from 16% to 2% and, in turn - a significant saving on their BIK payment!

These changes have been ‘in the works’ for a few years now. However, in July 2019 the Treasury decided to review previously published BIK rate tables for 2020/2021. Instead, they created two new tables: one for company cars registered before the 6th of April 2020 and the other for those registered after that date.

Why the last-minute alteration? Well, HMRC wanted to account for the difference in cars that were tested under the old NEDC (New European Driving Cycle) requirements from that of vehicles assessed by the new, more rigorous WLTP (Worldwide Harmonised Light Vehicle Test Procedure) criteria. From 2023/24, the two tables will be merged as rates align following the implementation of WLTP.

The decision was also made to introduce a zero per cent BIK rate for purely electric vehicles. That applies to cars registered both before the 6th of April 2020 and after. For EVs registered from 2020, their BIK rate will be 0% for one tax year, then will rise to 1% in 2021/22 and then to 2% in 2022/23.

Company car tax - how to find out what you need to pay

To figure out how much tax you’ll need to pay, you’ll first need to find out:

  • P11d Value - the value of the vehicle including VAT, all the optional extras and delivery charge. This value does not include road tax charges or the registration fee. Your employer should have this value handy for you among their records. If you’re a company director, then your dealership can provide you with this value.

  • Benefit-in-Kind % - vehicles are organised into groups based upon the level of emissions they produce to give a benefit in kind percentage. The emissions of any vehicle will be displayed on each relevant manufacturer website.
  • Personal Tax Rate - the final factor to consider when calculating how much company car tax you will pay is how much you earn. Your payments will depend upon which income tax bracket you are in. If you are in the 20% bracket, you will pay 20% of the taxable portion of the car's P11D value, if you are in the 40% tax bracket you will pay 40% of the taxable portion of the car's P11D value.

Here's a table to help you figure out which BIK rate you are eligible for on cars registered from 6th April 2020.

Cars registered from 6th April 2020:

CO2 (g/km)Electric Range (Miles)2020-21 (%)2021-22 (%)2022-23 (%)
0 N/A 0 1 2
1-50 >130 0 1 2
1-50 70-129 3 4 5
1-50 40-69 6 7 8
1-50 30-39 10 11 12
1-50 <30 12 13 14
51-54   13 14 15
55-59   14 15 16
60-64   15 16 17
65-69   16 17 18
70-74   17 18 19
75-79   18 19 20
80-84   19 20 21
85-89   20 21 22
90-94   21 22 23
95-99   22 23 24
100-104   23 24 25
105-109   24 25 26
110-114   25 26 27
115-119   26 27 28
120-124   27 28 29
125-129   28 29 30
130-134   29 30 31
135-139   30 31 32
140-144   31 32 33
145-149   32 33 34
150-154   33 34 35
155-159   34 35 36
160-164   35 36 37
165-169   36 37 37
170+   37 37 37

Calculating your company car tax

Now that you know which car tax band your vehicle falls into, you can find out the taxable value of your car by multiplying the P11D value of your car by the CO2 tax rate from the table. Once you’ve got this figure, you then multiply it by your income tax rate (20%, 40% or 50%) to get the amount of BIK tax you need to pay. While you’re likely to find a company car tax calculator with a simple online search, it all comes down to this simple equation:

P11d Value X Benefit-in-Kind % X Personal Tax Rate = Yearly BiK Tax

£25000 X 17% X 20% = £850

Please keep in mind that this calculation is of an incredibly simplified scenario.

Everyone's calculation will vary depending on things such as company car tax allowance, salary sacrifice, capital contributions, salary, fuel contributions and more.

Going forward with the new car tax

Now you know what company car tax changes are, and how you can find out and calculate what you’ll need to pay, you may find it worth switching to an EV or more low emission vehicle.

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