The company car is a new car for your exclusive use, with insurance and maintenance included. That’s why it’s seen as a major perk by the tax authorities. Below we explain how to calculate your company car tax and how to minimise it where possible.
As soon as you use a company car for a personal reason – and that includes driving to and from work – Her Majesty’s Revenue and Customs (HMRC) views that as a taxable payment, or ‘benefit in kind’. The Benefit-in-Kind (BIK) value that HMRC attaches to your car is a percentage of its list price, based on how much CO2 it puts out. For tax purposes, this price is known as the ‘P11D value’ because it’s the value of your car as it appears on your P11D form – a document that your employer provides to HMRC detailing any benefits you receive in addition to your salary.
This P11D value is made up of the car’s list price including VAT, delivery and any options costing more than £100; alternatively, you can view it as the manufacturer’s ‘on the road’ price minus the £55 standard registration fee for every new car and the first year’s road tax, if any. The BIK amount is added to your salary and then taxed at your usual income tax rate.
It all means that if you run a company car, you’re going to have to pay company car tax. However, since the car’s list price and CO2 emissions are integral to the tax calculation, you control how much this tax will be simply by choosing the right car.
Calculating your company car tax
Here’s how you work out how much tax you’re liable to pay on your company car:
1. Take your car’s ‘P11D value’ – the maker’s
list price plus VAT, delivery, number plates and any cost options; alternatively, take the On the Road price and take away the £55 registration fee and the cost of the first year’s road tax, if any.
2. Multiply that P11D value by the vehicle’s company car tax rate (from a sliding scale depending on the car’s official CO2 output, see below) to get your Benefit-in-Kind amount.
3. Multiply the BIK amount by your personal tax rate (20% for taxable income up to £32,010; 40% for taxable income from £32,011-£150,000*). The result is what you'll pay annually in tax for your company car. To take a simple example, a car with a P11D value of £10,000 and a company car tax rate of 15% will have a BIK value of £1500. If your personal tax rate is 20%, your company car tax on this vehicle will be 20% of £1500, ie £300 a year. *Most workers receive a tax-free allowance of £9440 (the figure for the 2013-14 tax year) before tax is applied, although this can be affected by personal financial circumstances. There is a personal tax rate of 50% for incomes above £150,000.
Company car tax rates
Even cars emitting as little as 1g/km CO2 are subject to company car tax; only those with zero emissions (currently purely electric cars) go free.
The Government adds an extra 3% penalty to diesel cars emitting more than 75g/km CO2 because diesels tend to release a greater quantity of harmful particulates and gases; diesel hybrids are exempt from the surcharge, however. The diesel surcharge reduces for vehicles that emit between 205 and 214g/km, and is removed for those that generate more than 215g/km.
Company car tax bands for the 2013-2014 tax year
(The 3% surcharge for diesel cars is shown in brackets where applicable.)