Company Car Tax Explained
(Posted on 30/08/17)
A company car has long been seen as a valuable perk and choosing one can be great fun. Less enjoyable are the potential tax implications, because choosing the wrong car can prove very expensive. With nearly one million motorists driving a company car, we explain how to choose the right one for your budget.
How does company-car tax work?
How much company-car tax you’ll pay depends on your earnings, the cost of the car and the amount of carbon dioxide (CO2) coming out of its exhaust. Simply put, high earners driving an expensive car that emits lots of CO2 will pay the most.
While your salary is likely to be fixed when you choose your company car, you can change the car you pick to adjust its value and CO2 emissions, reducing your tax liability in turn.
Her Majesty’s Revenue and Customs (HMRC) sees any private usage of a company car – even commuting – as a perk and refers to it as Benefit-in-Kind (BiK).
This is calculated by working out the car’s P11D value, which is the sum of its list price, cost of delivery, VAT and any optional extras (but doesn’t include road tax or first-year registration fees) and multiplying it by a percentage BiK band, determined by its CO2 emissions. The actual figure you’ll pay is this figure multiplied by your income tax band of 20%, 40% or 45%.
Company-car tax calculator: an example
For any make, model and type of car, the above formula is applied. As an example, if a hypothetical petrol BMW 3 Series has a P11D value of £30,000 and emissions of 106g/km of CO2, it’s in the BiK liability band of 20% based on its CO2 emissions. Therefore 20% of £30,000 is £6,000.
Depending on whether you’re a 20%, 40% or 45% income-tax payer, the amount of company car tax you’ll pay HMRC is this percentage of £6,000, so £1,200, £2,400 or £2,700 a year. Most companies will include this payment in your monthly salary, spreading the cost over the year.
BiK will increase year-on-year until 2020 at least. The above calculations are based on the 2017/18 financial year. In FY 2017/18, the BiK rate for the BMW goes up to 22%, so you’ll pay tax on £6,600 rather than £6,000.
Other factors influencing company-car tax
What fuel your car burns also affects the amount of company-car tax you’ll pay. Diesel cars generally have a BiK rate 3% higher than petrols. A high-mileage driver will usually recover the difference in terms of better fuel economy. On the other hand, if you’re a low-mileage driver, the petrol car may be the cheaper option.
As of the 2016-17 FY, electric cars, which were once free of company-car tax, attract a 7% BiK rate. So too do hydrogen fuel-cell cars.
Making financial contributions to your company car scheme will lower your BiK rate, while employees who use their car part-time are also liable for less BiK tax. To find out how much of a reduction in company-car tax you’re eligible for, use the company-car tax calculator on HM Revenue & Customs’ website: https://www.gov.uk/calculate-tax-on-company-cars
Company-car tax bands and rates
To help you work out what your car's BiK rate is, we’ve added a table below with the 2017/2018 rates. Note that company-car tax rates are updated every year, so the BiK percentage you’ll pay this year will be slightly different to next year's.
|CO2 emissions (g/km)||2017/2018 BIK rate (%) - petrol||2017/2018 BIK rate (%) – diesel|
Some companies offer the choice of a car allowance as an alternative to a company car. This is essentially a cash amount given to you each month to help with your personal motoring costs. As with anything, there are advantages and disadvantages to this.
A company car is likely to be renewed every few years and it’s possible maintenance and any repairs are covered by the business, protecting you against any unexpected bills and hassle. If you choose a car allowance, you aren’t restricted to the list of cars offered by the company and can pay towards owning the car outright, or buy a used car.
A car allowance can also be tempting if you already own a car you wouldn’t mind keeping or have a commute where you’d rather not drive a car at all.
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