Company car tax, also known as Benefit in Kind (BIK) tax, is the tax employees pay when they use a company car for private use, including commuting. This tax is calculated based on the car’s fuel type, CO2 emissions, and P11D value. Your income tax band determines how much car tax you pay on the benefit.
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What is Company Car Tax?
A company may provide an employee with a car for personal and work-related travel. When a company provides a vehicle for private use, it creates a benefit in kind that must be valued for tax purposes.
The employee pays Income Tax, while the employer pays Class 1A National Insurance contributions (NICs). An employee pays tax on the value of the company’s car, which depends on things like:
- Fuel type
- The car’s list price (P11D value)
- CO2 emissions
The taxable value may be lower if the car has low CO2 emissions, is available part-time, or if the employee contributes towards the cost.
Additionally, if your company pays for your fuel for your personal journeys, you will have to pay separate taxes.
Note: Lower-emission cars, particularly electric cars, have a lower tax rate. However, diesel and petrol cars have higher BIK tax rates.
How Company Car Tax Works?
In simple terms, a company car tax is considered a non-cash benefit provided by an employer. The amount of tax you pay on the company’s car depends on the following key factors:
P11D Value
This is the official taxable list price of the car for UK tax purposes, including VAT, delivery charges, and extra options. However, it excludes Vehicle Excise Duty (road tax) and the first registration fee. P11D does not depend on the actual price paid by the employer.
Benefit in Kind (BIK) Rate
BIKs are non-cash benefits provided by UK employers that have a taxable value but are not part of your normal salary. A company car is a common example of a benefit in kind.
BIK rate is the percentage of the car value that is taxable. This rate is calculated based on car emissions, fuel type, and P11D value. A car that produces fewer emissions usually has a lower tax rate.
Employee Income Tax Rate
Your income tax band also affects the amount of company car tax. You pay tax according to your earnings. A basic-rate taxpayer pays 20%, a higher-rate taxpayer pays 40%, and an additional-rate taxpayer pays 45%.
This tax rate is applied to the calculated BIK value of the company car to determine how much tax you must pay.
Company Car Tax Band
Benefit-in-kind rates for company cars change periodically. However, these changes are announced several years in advance by the UK government.
The BIK rates mainly depend on the car’s CO2 emissions. Vehicles with higher CO2 emissions have higher BIK rates, whereas vehicles with low CO2, like electric cars, have lower BIK rates.
Note: CO2 stands for Carbon Dioxide emissions produced by a vehicle, measured in grams per kilometre (g/km).
Low Emission Hybrid Cars
If your plug-in hybrid car emits 1 to 50g/km of CO2, its taxable value is based on its electric range or zero-emission electric range. This means how far the car can go on electric power before needing to recharge it.
If you don’t know the car’s zero-emission mileage figure, contact your employer.
Update Your Company Car Tax
If your company car or fuel benefit changes, you should update HMRC so your tax code can be adjusted. You can check or update your company car tax online.
For instance, if you get a company car or give one back, and if your employer starts or stops paying for fuel for your personal use, tell HMRC. It updates your tax code if a change affects the value of the car. This helps you pay the right tax.
Use HMRC’s company car benefit in kind calculator to see how much tax you might pay. A company car tax calculator estimates how much BIK tax you must pay for using a company car.
Company Car Tax Formula
You can calculate your company’s car tax by using the formula:
Company Car Tax= (P11D Value ✕ Benefit-In-Kind Rate) ✕ Employee Income Tax Rate
This formula calculates the tax payable each year.
Do I Have to Pay Tax on Company Car Fuel?
Yes, you may have to pay tax on company-provided fuel used for private journeys.
- If your employer pays for fuel used for your personal travel, you must pay the fuel benefit tax because HMRC treats it as BIK. This tax is calculated separately from the company vehicle tax.
- If you pay for your fuel yourself or reimburse your employer for private fuel, you do not pay the fuel benefit tax.
Fuel Benefit Charge
HMRC calculates the fuel benefit charge using a fixed annual multiplier. It applies the same benefit-in-kind percentage used for the car itself. This means that if you get free fuel for your private use, the fuel benefit can increase the overall tax liability.
Can I Reduce My Company Car Tax?
Yes, you can reduce your company car tax in certain ways approved by HMRC. Here are the main ways to reduce your car tax:
- Choose an electric vehicle (EV) because EVs have very low BIK rates. You receive a lower tax than diesel or petrol cars.
- Choose a low CO2 emission plug-in hybrid. They can help you reduce the tax amount, especially if they have a long electric driving range. If your vehicle has a long electric charge, you receive a lower BIK rate.
- Pay part of the car’s cost by yourself. This reduces the taxable value.
- Pay for your private fuel to avoid the fuel benefit tax.
- Some employers provide a car allowance instead of a company car. Getting a car allowance can reduce overall tax, depending on the employee’s situation.
Advantages and Disadvantages of Company Cars
Getting a company car may sound appealing, but there are some disadvantages to company cars. Let’s discuss some of the benefits and drawbacks of company cars.
Advantages
- A company car offers lower upfront costs for employees
- Employers often cover maintenance and insurance
- There are low tax benefits for low-emission vehicles
Disadvantages
- Employees have limited choices of vehicles
- High-emission vehicles result in higher BIK tax
- Tax payable on the benefit
How CheapAccountants Can Help You With Car Tax?
Managing tax affairs can be overwhelming and time-consuming. That’s where CAIL can help. Our experts can help you calculate company car tax and benefit-in-kind charges accurately. We provide accurate records and simplify compliance.
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Bottom Line
In the UK, company car tax is an important part of the UK tax system for employee benefits. This tax, also known as a benefit in kind, is applied when a company provides a car to an employee for private purposes.
The tax is calculated based on the car’s P11D value, fuel type, your income tax band, and CO2 emissions. In recent years, the BIK rates have increased, but at the same time, the UK government is maintaining strong incentives for low-emission and electric vehicles.
So, understand the company car tax to make better financial decisions. It allows employers to design more tax-efficient car schemes for the company.
Get in touch with our young, clever, and tech-driven professionals if you want to choose the solution to tax burden or accounting problems in the UK for your income. We will ensure to offer the best services.
Disclaimer: This article intends to provide general information on company car tax in the UK.