04/07/2015
Receiving a company car is often seen as one of the most attractive perks an employer can offer. It provides the convenience of a vehicle for both business and personal use, significantly reducing your everyday living costs by removing the need to purchase or hire a private vehicle. Traditionally, these cars might have been bought wholesale with little input from the employee, but modern practices often allow employees to select from a range of employer-approved vehicles, adding a touch of personal choice to this valuable benefit.
However, as the saying goes, there’s no such thing as a free lunch. The privilege of a company car comes with a tax implication, known as company car tax, which is deducted directly from your wages via the Pay As You Earn (PAYE) system. Understanding how this tax works is crucial for any employee considering or currently benefiting from a company car, as it directly impacts your take-home pay and overall financial planning.
- How Does Company Car Tax Work?
- How Much Does Company Car Tax Cost?
- Company Car Tax Bands (Benefit in Kind - BIK Rates)
- How is Company Car Tax Calculated?
- Benefits and Drawbacks of a Company Car
- The Benefits of Electric Company Cars
- Do Companies Pay Tax on a Company Car?
- Frequently Asked Questions About Company Car Tax
- Summary
How Does Company Car Tax Work?
In the UK, a company car provided for private use is considered an ‘employment benefit’. Along with other perks like accommodation or certain loans, it falls under the umbrella of benefits in kind (BIK). This means that while your employer provides the car, you, as the employee, are liable to pay tax on the monetary value of this benefit. This tax is typically collected by HM Revenue & Customs (HMRC) through your monthly salary under the PAYE system, making it essential to understand the potential cost before committing to a company car.
Knowing the precise amount of company car tax you're expected to pay allows you to budget effectively and make an informed decision when choosing a vehicle. It ensures that the perceived benefit doesn't turn into an unexpected financial burden.
How Much Does Company Car Tax Cost?
The cost of company car tax isn't a fixed amount; it's determined by a multitude of variables. Two of the most significant factors are your annual earnings and, increasingly, the vehicle's environmental impact. With growing climate awareness, CO2 emissions play a pivotal role in the calculation, incentivising the choice of greener vehicles.
Specifically, the CO2 emissions bracket of the vehicle, combined with its P11D value, are the primary determinants of your tax liability. The P11D value represents the car's list price, including VAT, delivery charges, and any optional accessories, but excluding the first year's road tax and registration fee. Furthermore, to encourage the adoption of cleaner vehicles, diesel cars typically incur an additional 4% surcharge on their tax rate, unless they meet stringent Real Driving Emissions Step 2 (RDE2) standards. Petrol and electric cars, conversely, are exempt from this added CO2 emissions tax.
Company car tax calculators categorise vehicles into CO2 emissions bands, often using data from the Worldwide Harmonised Light Vehicle Test Procedure (WLTP) to accurately assess fuel efficiency and CO2 output. This data directly influences the tax you'll pay, meaning that opting for vehicles with lower emissions, such as fuel-efficient petrol cars or, ideally, electric cars, can lead to significant tax savings.
Moreover, the P11D value of your chosen car is added to your yearly salary for the purpose of calculating your overall income tax liability. This is where a company car can sometimes lead to a heavier burden than anticipated. A high P11D value could potentially push you into a higher income tax bracket. For instance, if your earnings are close to the threshold for the 20% basic income tax rate, a company car with a substantial P11D value might elevate you into the 40% higher rate bracket, effectively doubling your income tax on a portion of your earnings. This highlights the importance of careful calculation and consideration.
Company Car Tax Bands (Benefit in Kind - BIK Rates)
The company car tax bands, also known as Benefit in Kind (BIK) tax, are directly correlated with the CO2 emissions of your vehicle. The lower the CO2 output, the lower the BIK percentage applied to the car's P11D value. Here's a breakdown of the bands for petrol-powered and hybrid-powered cars for the tax year 2021-2022, as listed by HM Revenue & Customs:
Petrol and Hybrid Cars (Tax Year 2021-2022)
| CO2 Emissions (g/km) | Electric Mileage Range (NEDC) | BIK % (WLTP) |
|---|---|---|
| 0 – 1 | 130 and above | 1% |
| 1 to 50 | 70 to 129 | 2% |
| 1 to 50 | 40 to 69 | 5% |
| 1 to 50 | 30 to 39 | 8% |
| 1 to 50 | less than 30 | 12% |
| 51 to 54 | – | 15% |
| 55 to 59 | – | 16% |
| 60 to 64 | – | 17% |
| 65 to 69 | – | 18% |
| 70 to 74 | – | 19% |
| 75 to 79 | – | 20% |
| 80 to 84 | – | 21% |
| 85 to 89 | – | 22% |
| 90 to 94 | – | 23% |
| 95 to 99 | – | 24% |
| 100 to 104 | – | 25% |
| 105 to 109 | – | 26% |
| 110 to 114 | – | 27% |
| 115 to 119 | – | 28% |
| 120 to 124 | – | 29% |
| 125 to 129 | – | 30% |
| 130 to 134 | – | 31% |
| 135 to 139 | – | 32% |
| 140 to 144 | – | 33% |
| 145 to 149 | – | 34% |
| 150 to 154 | – | 35% |
| 155 to 159 | – | 36% |
| 160 to 164 | – | 37% |
| 165 to 169 | – | 37% |
| 170 and above | – | 37% |
As noted, diesel engines generally face a higher BIK rate. Here's a comparative look at diesel BIK rates (excluding RDE2 compliant vehicles):
Diesel Cars (Tax Year 2019/20 - illustrating higher rates)
| CO2 (g/km) | BIK Rate % (Diesel) |
|---|---|
| 0-50 | 20% |
| 51-75 | 23% |
| 76-94 | 26% |
| 95-99 | 27% |
| 100-104 | 28% |
| 105-109 | 29% |
| 110-114 | 30% |
| 115-119 | 31% |
| 120-124 | 32% |
| 125-129 | 33% |
| 130-134 | 34% |
| 135-139 | 35% |
| 140-144 | 36% |
| 145-149 | 37% |
| 150-154 | 38% |
| 155-159 | 39% |
| 160-164 | 40% |
| 165+ | 41% |
It's important to remember that diesel cars are exempt from the additional 4% surcharge if they meet the rigorous Real Driving Emissions Step 2 (RDE2) standards, which signify a much lower level of harmful NOX emissions.
How is Company Car Tax Calculated?
Calculating the exact amount of company car tax you'll owe involves a few steps, combining the factors we've discussed. It's not just about CO2 emissions; the vehicle's market value plays an equally significant role.
- Determine the P11D Value: This is the car's official list price, including VAT and any factory-fitted options, but excluding the first year's road tax and registration fee.
- Find the BIK Percentage: Based on the car's CO2 emissions (and electric range for hybrids), locate the corresponding BIK percentage from the appropriate tax band table (petrol/hybrid or diesel). Remember to account for the 4% diesel surcharge if applicable and if the vehicle is not RDE2 compliant.
- Calculate the Benefit in Kind (BIK) Value: Multiply the P11D value by the BIK percentage.
Formula: P11D Value × BIK Percentage = BIK Value - Apply Your Income Tax Rate: Finally, multiply the BIK value by your personal income tax rate (e.g., 20%, 40%, or 45%). This will give you the total annual company car tax you need to pay.
Formula: BIK Value × Your Income Tax Rate = Annual Company Car Tax
For example, if you have a petrol car with a P11D value of £30,000 and a BIK percentage of 20% (due to its CO2 emissions), the BIK value would be £6,000 (£30,000 x 0.20). If you are a 20% basic rate taxpayer, your annual company car tax would be £1,200 (£6,000 x 0.20), or £100 per month. If you were a 40% higher rate taxpayer, this would jump to £2,400 per year, or £200 per month.
Benefits and Drawbacks of a Company Car
While the tax implications are clear, a company car still offers several compelling advantages and a few notable disadvantages that warrant consideration.
Benefits of a Company Car:
- No Personal Financial Commitment: As the employer pays for the lease or purchase of the vehicle, you are not tied down to a personal finance contract like a hire purchase. The employer bears the financial responsibility for the vehicle's acquisition.
- Reduced Running Costs: Typically, the employer is responsible for most, if not all, of the car's running costs. This often includes insurance, routine maintenance, MOT tests, and servicing obligations. This can lead to substantial savings compared to owning a private vehicle.
- Newer, Safer Vehicles: Companies often provide relatively new vehicles, ensuring you drive a car that is safe, reliable, and equipped with modern features.
- Convenience: Having a car readily available for both business and personal travel without the hassle of private ownership can be incredibly convenient.
Drawbacks of a Company Car:
- Limited Choice: While some modern schemes offer options, your choice of vehicle is often strictly limited to a pre-approved list. This might disappoint car enthusiasts or those with specific preferences. Employers often buy in bulk to gain discounts, which naturally restricts variety.
- No Ownership: You never actually own the vehicle. If you leave your job, you lose the car. This means you don't build up an asset that could be sold off in tough times or traded in for a new vehicle.
- Tax Implications: As discussed, the BIK tax can be a significant deduction from your wages. Furthermore, a high P11D value, especially combined with higher CO2 emissions, could potentially push you into a higher income tax bracket, reducing your overall take-home pay more than anticipated.
- Private Fuel Benefit: If your employer also pays for your private fuel, this constitutes another BIK and will be taxed separately, adding to your overall tax burden.
The Benefits of Electric Company Cars
In recent years, electric vehicles (EVs) have emerged as the most advantageous option for company cars, primarily due to their exceptionally low taxable benefit. For the 2021-2022 financial year, a driver of an electric company car paid a BIK rate of just 1%. This rate has been incrementally increasing but remains significantly lower than for petrol or diesel cars, making EVs incredibly attractive from a tax perspective.
Hybrid cars also offer a favourable tax position compared to traditional internal combustion engine (ICE) vehicles. Their BIK rates can range from around 2% to 14% on average, depending on their electric range and CO2 emissions, offering a good middle ground for those not ready for a full EV.
Beyond the tax savings, the shift towards electric vehicles aligns with global environmental goals and changing market dynamics. With rising petrol prices and the UK's aim to phase out the production of new petrol and diesel cars by 2030, opting for an EV company car can be a strategic move. Not only do you benefit from lower running costs (electricity is generally cheaper than petrol/diesel per mile), but you also contribute to reduced carbon dioxide emissions and future-proof your motoring choices. This forward-thinking approach can save you money while significantly lowering your carbon footprint.
Do Companies Pay Tax on a Company Car?
It's a common misconception that companies pay tax on the company car itself in the same way an employee does. To clarify, if an employer provides a company car that is used for private travel (which includes commuting), it is the *employee* or director using the car who is subject to tax as a Benefit in Kind (BIK). The company, however, has specific reporting obligations to HMRC regarding the provision of such benefits.
The tax rate the employee pays is, as we've explored, dependent on the car’s list price (P11D value) and its CO2 emissions. Low-emission vehicles are deliberately given significant tax breaks to encourage their adoption. HMRC provides an online service, 'Check or update your company car tax', which employees can use to:
- Verify their company car’s details.
- Inform HMRC about any changes to their car since 6 April.
- Update their fuel benefit details if their employer pays for private fuel.
To use this service, you'll need specific information such as the car’s list price, CO2 emissions data, and for hybrid cars, the zero-emission mileage figure. This service is not available if your employer uses 'payrolling' for benefits (where tax is directly accounted for in your payroll) or for commercial vehicles like vans.
From the employer's perspective, while they don't pay BIK tax, they do incur costs related to providing the car (lease payments, maintenance, insurance) and must report these benefits to HMRC on a P11D form at the end of each tax year. They may also be liable for Class 1A National Insurance Contributions (NICs) on the value of the BIK provided to the employee.
Frequently Asked Questions About Company Car Tax
What is a P11D value?
The P11D value is the official list price of a company car, including VAT, delivery charges, and any optional accessories (e.g., metallic paint, upgraded sound system) that were fitted at the factory. It excludes the first year's road tax and registration fee. This value is crucial for calculating your Benefit in Kind (BIK) tax.
What is Benefit in Kind (BIK) tax?
Benefit in Kind (BIK) tax is a tax levied on non-cash benefits provided by an employer to an employee. A company car used for private purposes is a prime example of such a benefit. The tax is calculated based on the car's P11D value and its CO2 emissions, determining a percentage (the BIK rate) which is then applied to the P11D value to get the taxable benefit, on which you pay tax at your marginal income tax rate.
Does commuting count as private use for company car tax?
Yes, for company car tax purposes, commuting (travel between your home and your permanent workplace) is generally considered private use. Only journeys that are solely for business purposes (e.g., travelling between different client sites during the workday) are not considered private use. Because most employees use their company car for commuting, it almost always triggers a BIK tax liability.
Can I opt out of a company car scheme?
Many employers offer a 'cash allowance' alternative to a company car. This gives employees the option to take a taxable cash sum instead of the car, which they can then use towards a private vehicle. The decision to opt out should be based on a careful calculation of the BIK tax savings versus the cash allowance and the costs of running a private vehicle.
How often do BIK rates change?
BIK rates are reviewed and often adjusted by HMRC annually, typically announced in the Budget or Autumn Statement. They are usually set for several years in advance to provide certainty for employers and employees, particularly regarding the rates for ultra-low emission vehicles, which are designed to incentivise the uptake of greener cars.
Summary
A company car is undeniably a fantastic employee perk, offering considerable convenience and cost savings on everyday motoring. However, its benefits are not entirely 'free'. The system of company car tax, or Benefit in Kind (BIK), ensures that the privilege is accounted for, with tax deducted from your wages via the PAYE system.
The amount of tax you'll pay is influenced by several key factors: your annual earnings, the car's P11D value (its list price), and critically, its CO2 emissions. Vehicles with higher emissions, particularly non-RDE2 compliant diesels, attract higher tax rates. Conversely, electric vehicles and plug-in hybrids are heavily favoured with significantly lower BIK rates, making them an increasingly attractive and financially sensible choice in the current climate.
While the employer covers the lease, insurance, maintenance, MOT, and servicing, the employee bears the BIK tax. It's crucial to understand that you never truly own the vehicle, and your choice of car might be limited. More importantly, carefully assess how the car's P11D value could impact your personal income tax bracket. Performing a thorough calculation before accepting a company car is essential to ensure this valuable benefit truly works in your favour and doesn't lead to unexpected financial implications.
If you want to read more articles similar to Company Car Tax in the UK: Your Essential Guide, you can visit the Automotive category.