Company cars are a prime example of a potential taxable benefit that falls outside of standard National Insurance tax contributions.
What are taxable benefits?
If you drive a car that has been provided by your employer, and you can use that vehicle for personal transport outside of work, then it’s seen as a taxable perk by HMRC.
It’s important to know how much tax you can expect to pay, particularly if you are deciding which car you want.
There are all sorts of calculations which come into play. Tax band rates are primarily based on a car’s CO2 emissions but the amount of tax you actually pay is determined by the list price of the car, personal tax rate (20%, 40% or 50%).
The P11D value will be the list price of the car before non-taxable items (ie first-year VED road tax, first registration fee, telephone installations) but will also include the cost of optional extras.
No company car tax on electric cars in 2020/21
In July 2019, the Treasury scrapped the previously published BIK tables for 2020/21 and create two new ones – one for those driving a company car registered from 6 April 2020 and one for those driving one registered before that date.
This was to separate cars that had their emissions tested under the old NEDC (New European Drive Cycle) criteria from those tested under the new WLTP requirements.
One effect of the changes was the introduction of a 0% BIK rate for EVs registered from 6 April 2020, rising to 1% in 2021/22 and 2% in 2022/2023.
The 0% rate also covers full-electric company cars registered before 6 April 2020, as well as hybrids registered after that date that emit 1-50g/km of CO2 and have a pure electric range of 130 miles.
From 2023/24 onwards, the two tables will merge to become one again, realigning the rates following the implementation of WLTP. A 2% surcharge on diesel company cars will remain in place, models that prove to be RDE2 compliant will be exempt.
What car is best for company car tax?
The easiest way of calculating how much tax you will have to pay on a company car is to visit the HMRC website, where it has a company car tax calculator with plenty of additional help to ensure you’re paying the right amount of tax.
There are 21 emissions bands, starting with vehicles that emit 0-50g/km, ranging up to those models emitting 180g/km or more, and the amount of tax you pay is a percentage of the car’s list price, which HMRC refers to as the P11D value.
One way you can reduce the amount of BIK you pay is to declare if you only have access to the vehicle part-time, or if you contribute to the initial cost of the vehicle.
How much company car tax will I pay?
The amount of company car tax you actually pay is dependent on your annual salary. For example, if you fall into the 20% income tax bracket, you’ll pay 20% of the taxable portion of the car’s P11D value.
Those in the 40% tax bracket pay 40% of the P11D value, usually be deducted from the monthly pay packet.
What about diesels?
Most diesel cars carry a 4% surcharge over petrol models with similar emissions, because they emit greater amounts of harmful particulates – important, then, to work out whether you cover enough miles annually to make up the extra cost of a diesel company car in fuel savings.