Company-car tax explained
We explain about company cars and how company-car tax affects you
A company car is a valuable perk and choosing one can be very exciting. However, the potential tax implications are rather less appealing; choosing the wrong car can prove very expensive. With close to one million motorists driving company cars of all kinds in the UK, we explain how to choose the right one for your budget.
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 with a high CO2 emissions figure will pay the most. NOx (nitrogen oxide) emissions are also penalised with most diesel cars paying an additional tax surcharge compared to their petrol counterparts. In the current 2020/21 tax year, all electric cars will be eligible for a 0% tax rate, with bills rising to just 2% for the 2022/23 tax year.
All this means that, while your salary is likely to be rigidly fixed when you choose your company car, you can make your car selection in such a way as to reduce your tax liability. Essentially, the lower the car’s purchase price and the lower its emissions, the less Benefit-in-Kind (BiK) company car tax you'll need to pay.
How does company-car tax work?
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 BiK band percentage, which is 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% for residents of England and Wales. Or multiplied by 19%, 20%, 21%, 41% or 46% for residents of Scotland.
What is a P11D?
As above, your income tax band affects the amount of company-car tax you pay. In the current 2020/21 tax year, employees earning between £12,501 and £50,000 per year fall into the basic rate (20%) income tax bracket, so pay 20% of the tax attributed to the car’s P11D value. Employees earning between £50,001 and £150,000 fall into the higher rate (40%) tax bracket, and pay 40% of the taxable portion of the car’s P11D value.
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 110g/km of CO2, it’s in the BiK liability band of 25% based on its CO2 emissions. Therefore, the rateable figure is £7,500 – 25% of £30,000.
If you live in England or Wales it depends 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 £7,500, so £1,500, £3,000 or £3,375 a year.
Scotland residents will be taxed in the same way using the Scottish rates of tax of 19%, 20%, 21%, 41% and 46%, making the amount of company car tax you’ll pay to the HMRC on £7,500 would be £1,425 at the lower rate rising to £3,450 at the (highest) additional rate. Most companies will deduct the tax due from your monthly salary, spreading the cost over the year.
BiK bands are adjusted every financial year (this runs from 6 April to 5 April the year after), and the bandings figures have increased year-on-year. All electric cars registered before 6 April 2020 are given a tax break completely for 2020/21, paying no company-car tax at all. Rates then increase by 1% per year from the 2021/22 tax year.
From 1 April 2018, an additional 4% was added to the BiK rate of all diesel cars, with the exception of diesel cars that meet the Real Driving Emissions Standards 2 (RDE2) standards. It's worth noting that only a small number of diesels currently meet these regulations. For a diesel car that emits 110g/km and does not meet RDE2 standards, the additional 4% incurred will raise the BiK rate to 29%, compared to 25% for a petrol model with the same emissions figure.
Other factors influencing company-car tax
What fuel your car burns also affects the amount of company-car tax you’ll pay. As discussed, most diesel cars face a BiK rate 4% 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.
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
Changes to company car tax from 2020/21 onwards
In 2019, the Treasury announced that the BiK rates for the 2020/21 tax year would be replaced by two separate sets of rates; one for drivers of cars registered before 6 April 2020 and one for cars registered after that date.
This split separates cars that had their emissions tested under the old NEDC (New European Drive Cycle) testing from those that have been tested under the new WLTP (Worldwide Harmonised Light Vehicle Test Procedure) criteria, with the latter generally producing a higher CO2 reading. On average, new cars registered from 6 April 2020 onwards will benefit from a two per cent cut in their BiK rates from the 2020/21 tax year onwards.
The most significant change for the 2020/21 tax year is the introduction of a zero per cent BiK rate for EVs registered from 6 April 2020. This will rise to one per cent in 2021/22 and two per cent in 2022/23.
This zero per cent rate will also be retrospectively applied to pure-electric company cars registered before 6 April 2020, along with hybrid cars registered after this date that emit under 50g/km of CO2 and are capable of a pure electric range of 130 miles. Although at present in the UK, there is no model on sale that can meet these criteria.
From the 2023/24 tax year, the BiK rates will be merged to realign them once WLTP emissions testing has been fully implemented. Drivers of diesel-powered cars will still incur a two per cent surcharge on their company cars, with models that meet the RDE2 testing criteria being exempt.
Company-car tax bands and rates for 2020/21
To help you work out what your car's BiK rate is, we’ve added the BiK rates for cars registered before 6 April 2020 and for those registered after this date. Note that company-car tax rates are updated every year, so the BiK percentage you’ll pay this year will be slightly different next year.
Company car tax bands 2020/21 – Cars first registered from 6 April 2020
|CO2 emissions (g/km)||Electric range (miles)||Appropriate percentage|
Company car tax bands 2020/21 – Cars first registered before 6 April 2020
|CO2 emissions (g/km)||Electric range (miles)||Appropriate percentage|
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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