Company Car Tax Explained

Company Car Tax Explained

For those of us fortunate to have a job that comes with a company car, it’s an exciting perk. After all, we get to choose which car we drive (usually from a list provided by our firm’s leasing company) and then select the engine size, fuel type, colour and perhaps even the trim and a number of optional extras.

With insurance, road tax and maintenance all usually covered for you, getting behind the wheel of a company car is as close to hassle-free driving as you can get. However, it isn’t a freebie. In fact, consecutive government Chancellors have turned an increasingly greedy eye towards the company car perk, squeezing more and more tax from their drivers. So how is company car tax explained?

HMRC’s company car tax regulations are due to change again during the next tax year, so to explain how this is going to work and help you work out what tax you’re likely to pay, we’ve done some research. We hope you’ll find this useful.

How does company car tax work?

If you’re lucky enough to drive a company car, the government will tax you for the privilege. Unlike in previous decades, when tax on company cars was partly calculated based on how many business miles you drove, there’s no way to reduce it or even dodge it.

Any potential loop holes were slammed firmly shut and locked tight years ago. Now, your company car tax is worked out using four pretty rigid criteria:

Your salary – how much you earn determined which income tax bracket you sit in

The cost of your car – this includes the list price, delivery, VAT and any extras you’ve chosen

CO2 emissions – the higher your emissions, the more you’ll pay

Engine fuel type – you’ll currently pay a higher percentage for driving a diesel engine car than one using petrol

As you can see, you can limit the amount of tax you pay by earning as little as possible, choosing the least expensive car on the list, and opting for one with the least CO2 emissions (only cars with zero CO2 emissions are exempt). But where’s the fun in that?

The only way you can escape the clutches of the tax man is if you only ever use your company car for business driving. That means no private driving. And the tax man classes driving to and from work as private driving, which means if your company car makes its way to your home – ever – you’re going to find yourself paying tax.

So, if you want to earn a decent crust and drive a nice car, the government will certainly make pay for it. But compared to the cost of buying, insuring, taxing and maintaining your own car, it’s still a pretty good perk.

Of course, the government doesn’t call it a perk – that would be far too simple. As far as they’re concerned, it’s a Benefit in Kind, or a BIK. This BIK is used to calculate the amount of tax you’ll actually pay on your company car. So how does company car tax work?

How much tax will I pay on a company car?

The starting point for working out your company car tax, is the value of your car. Your BIK is calculates as a percentage of your car’s value, as shown on your P11D tax form. Remember, the P11D value also includes things such as VAT, delivery charges, and the price of any options you have chosen. So think carefully about these when choosing your car.

The BIK percentage of your car’s value is worked out using the vehicle’s CO2 emissions. For instance, if you drive a diesel car with emissions of 102g/km, you’re looking at a BIK percentage of 20%.

Don’t worry, this isn’t 20% of your car’s P11D value (drivers of upmarket cars such BMWs, Audis, Mercedes, etc, can breathe a sigh of relief). The final ingredient in your BIK company car tax calculation is your salary. Or rather, the tax band your salary puts you in.

In you earn under £43,000 you’ll pay a basic income tax rate of 20%. Those earning over this will pay either 40% or 45%.

So, to show how this works, let’s look at a car worth £30,000, with CO2 emissions of 102g/km, driven by a basic rate tax payer. This works out as follows:

Car value (£30,000) x CO2 (20%) = £6,000

£6,000 x Basic rate (20%) = £1,200 company car tax per annum.

So, using this simple calculation, you can see that driver of this car will face an annual company car tax bill of £1,200, or £100 per month.

By comparison, a driver earning the top rate of income tax (45%) would pay £2,700 per year to drive the same car.

What are the company car tax bands?

company car tax bands

Despite it perhaps appearing to be a complex way to work out your company car tax figure, as you can see it’s actually quite straightforward.

Indeed, the only potentially confusing element might be your car’s CO2 emissions but even these are clearly specified by your car’s manufacturer.

Naturally, if you get a promotion of a pay rise and move from the basic rate of income tax to a higher rate, this will change the amount you pay, but hopefully your increased salary will more than compensate for this?

If you’re still wondering ‘how much tax will I pay on a company car’, we’ve looked into how your car’s CO2 emissions impact on the company car tax you’ll pay by breaking this down into the bands specified by HMRC. This also shows the difference in percentage rates between petrol engine cars and diesel engine cars.

As you can see, the lower your car’s emissions, the less tax you’ll pay. This policy clearly reflects the government’s current attempts to limit air pollution levels.

With company car tax explained, we hope you’ll now feel able to make a more informed choice about the next company car you drive and also avoid any nasty surprises when your company car tax is calculated.