Company Car Tax explained

If your business runs a company car scheme, you should consider all the pros and cons before applying for a vehicle. One important aspect to think about is Company Car Tax.

What is Company Car Tax?

HMRC classes company cars as a taxable benefit to the business. As such, the government applies extra tax to salaries of company car users.

Business vehicles are classed as a ‘Benefit In Kind’, or BIK. Because your employer technically pays for you to use the car, it’s seen as an addition to your salary. This means that the vehicle is just as subject to tax as your income.

When does it apply?

If your employment contract includes a car – which you can use outside of work – the vehicle’s subject to Company Car Tax.

How much Company Car Tax will I pay?

There is no fixed set rate. Company Car Tax is calculated based on several factors. These include:

  • the vehicle’s CO2 emissions level
  • the official list price for the model
  • the combined value of optional extras and accessories
  • whether the vehicle runs on petrol or diesel
  • your own annual salary

Different efficiency-level bands are taxed at varying percentages of the car’s total value. This is also known as the P11D value, which excludes the first year’s road tax and the vehicle registration charge. It is named for the corresponding form your employer needs to submit to HMRC. Percentages change with each new tax year, so please be aware of the current rates.

Multiply the P11D by the Company Car Tax percentage to find the total BIK value. For example, a £15,000 car in a 15 percent tax bracket has a BIK of £2,250. You will pay off a set fraction of this amount in tax.

Your income tax bracket determines the percentage of that taxable amount you pay annually. If your salary is taxed at 20 percent, you pay 20 percent of the BIK per year. In the above example, that amount would be £450.

HMRC has a Company Car Tax calculator on its website.

Are there ways to pay less Company Car Tax?

Electric vehicles are subject to the lowest rates of tax. Changes to Company Car Tax bands mean that electric and ultra-low-emissions models are no longer fully exempt.

If you only use the vehicle part-time, the tax amount is proportionally reduced.

The other way to lower your Company Car Tax is to make contributions to the cost of the vehicle. This could, for example, be via a leasing agreement with your employer.

Should I get a company car?

Our Lipscomb dealership teams across Kent can give you more advice on business motoring. We have fleet experts in Canterbury, Ashford and Maidstone – contact us for more information today.