The tax implications of providing a company car can be complex-and made even more confusing by HMRC's tax changes.
To help you along, we've put together an article that will guide you through the essentials.
We'll start with the basics, explaining who pays for company car tax and how it is calculated, before we run you through a quick summary of tax rates changes that were announced in July 2019.
Our article will likely answer the key questions that you have surrounding company car tax, but bear in mind that it isn't a substitute for professional advice. If you have further questions about tax and how it affects your business, do reach out our accountants at Forma for personalised advice.
The tax implications of providing a company car can be complex—and made even more confusing by HMRC's tax changes. To help you along, we've put together an article that will guide you through the essentials, such as who pays for company car tax and how it is calculated.
Our article will likely answer the key questions that you have surrounding company car tax, but bear in mind that it isn't a substitute for professional advice.
If you have further questions about tax and how it affects your business, do reach out our accountants at Forma for personalised advice.
Company car tax: The basics explained
What is company car tax?
It is a tax paid for by employees driving a vehicle (car, van or motorcycle) owned by the company they're employed at.
The tax is deducted from the employee's salary as part of the PAYE scheme, and recorded on a P11D form.
Who pays the company car tax?
Employees pay the company car tax via salary sacrifice; the tax is deducted from their salary as a benefit in kind (BIK) tax.
This means that you'll need to pay company car tax if the following applies:
- You're an employee driving a company-owned car
- You're self-employed, and are operating through a limited company. In this case, you're considered an employee of your company.
If you're an employer, you need to pay Class 1A National Insurance contributions, as well as file a P46 form for each company vehicle you own.
How is the company car tax calculated?
There are several factors that determine the rates at which company cars are taxed.
- The P11D value of the car
- The amount of CO2 the car emits
- The type of car (petrol, diesel, hybrid or electric)
- The BIK rate of the car: This is based on the car's fuel type and CO2 emissions
- The income tax bracket you're in
- Access to car: The amount of time that you have access to a car across the tax year
- A 4% surcharge imposed on diesel cars
- The registration date of your vehicle
Further information on the P11D value and list price...
Before we dive into the calculations, we'll first explain the P11D value and list price in detail.
The P11D value refers to the total value of your car when it is brand new.
It includes the list price, VAT, delivery charges, standard accessories and optional extras. The first registration fee and annual road tax aren't included.
Additional modifications that are made to the vehicle should be included in the list price, even if these are made after delivery. There is one exception—additional modifications made after the delivery that cost less than £100 aren't added to the list price. The costs of accessories that are included by the manufacturer before the delivery of the car should also be included in the list price.
And if you plan to use a hybrid or electric car, you'll need to include the cost of the battery in the list price, even if the battery is leased separately.
Calculating your annual company car tax payment...
Now that you have the P11D value of the company car, you can then calculate the annual company car tax:
1. Multiply the car's BIK percentage rate by its P11D value. This figure is your BIK value.
2. Multiply the BIK value by the percentage rate of your income tax bracket (basic at 20%, higher at 40% or additional at 45%)
The value that you obtain is your annual company car tax payment.
What about diesel cars?
A diesel supplement of 4% will apply if you're:
- Driving a diesel car that was registered between 1 January 1998 and 31 August 2017
- Driving a diesel car that was registered on or after 1 September 2017, but isn't RDE2-certified.
The 4% supplement doesn't apply to diesel plug-in hybrids, as these are considered alternative fuel vehicles.
What about company car tax for electric and hybrid cars?
The BIK value of electric and hybrid cars is calculated using the same method that we've indicated for normal cars.
The current BIK rates (2021/22) for electric cars starts at 1%.
The amount of company car tax paid on hybrid cars will depend on how far the vehicles can be driven with zero emissions.
In April 2020, the government announced a change in the level of CO2 emissions used to calculate tax rates; the previous NEDC standard was replaced with the current WLTP figures.
As such, the BIK rate you'll use will depend on whether your vehicle was registered before 6 April 2020, or from 6 April 2020. We've included the two tax tables below.
BIK rates: 2021/22
Zero emission vehicles:
For the 2021/22 tax year, the BIK rate for zero-emission company cars is set at 1%.
The rate will apply regardless of the registration date of the vehicle.
Cars registered on or after 6th April 2020:
The effect of WLTP will be taken into account for cars registered from 6th April 2020.
There's a 1% reduction in 2021/22, and a 2% reduction was applicable in the previous tax year (2020/21). By April 2022, there won't be a difference between the NEDC and WLTP rates.
The 4% diesel supplement will continue to apply on the new rates.
However, vehicles that meet the RDE2 rules will be exempt.
Cars registered before 6 April 2020
Cars registered from 6 April 2020
Are there other tax-related costs that I need to be aware of?
A car fuel benefit is charged to the employee or company director if he or she receives free fuel for private use in a company car.
This is classed as a benefit, so employees are required to pay tax on it. Gov.uk has a car fuel benefit calculator you can use to work out the tax to be paid.
Are there exemptions from tax on company cars?
You are exempt from company car tax if:
- The vehicle is only used for business trips
- The vehicle has been adapted for an employee with a disability. The vehicle should only be used for commuting to and from work and business purposes.
- It is a shared vehicle that's kept on site, and shared by employees for business purposes.