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Understanding company car tax regulations

By raccars Published

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Work out your company car tax obligations with this explanation of the rules and regulations.

Enjoying the use of a company car can be one of the best benefits of a job. However, it can be difficult to decipher the complicated and confusing regulations relating to how much tax you will be obliged to pay on this perk. While road tax or VED is calculated according to CO2 emissions, company car tax calculations take a number of other figures into account including the purchase price with any options added and what kind of fuel it runs on. When and how you use the car and how you pay for it are also considered.

Why do you pay company car tax?

A company car is often given to employees who need to drive in order to carry out their role. However company cars can also be used by employees outside working hours as their personal transport, which makes them a taxable benefit. The correct term for this is a 'Benefit in Kind' or BIK, meaning that a financial value is applied to your use of the car as your personal transport.

As far as Her Majesty's Revenue and Customs (HMRC) is concerned, the personal use of a company car is the equivalent of a higher salary and must be taxed accordingly. The HMRC website includes a company car tax calculator tool and lots of other helpful information about company car ownership.

Working out the value of your company car tax

If you want to work out your company car tax obligations, start with CO2 emissions. Emissions are categorised into 30 different bands, which are taxed at different percentages of the car's list price, known as its P11D value. The P11D value includes payable optional extras but excludes untaxed elements of the purchase such as the first year's VED and the initial registration cost.

Even if you negotiate a purchase price for the car which is lower than the HMRC recognised P11D value, you are still taxed according to the original BIK value. Only using the car part time or contributing towards its purchase can reduce what you pay in company car tax.

BIK rates start at five per cent for cars with the lowest CO2 emissions, going up to 35 per cent for cars with higher levels of emissions. BIK rates are adjusted with the tax year, so this month ultra low emissions and electric vehicles will be subject to a BIK rate of seven or 10 percent where they were previously exempt. BIK rates will change again next April.

Next look at your fuel type. Diesel powered cars are charged an extra three per cent over petrol due to higher emissions of dangerous particulates, so company car owners will need to consider whether the mileage they cover is high enough to make it worth paying the extra company car tax on a diesel.

Your company car tax also depends upon how much you earn. Those who pay income tax at 20 per cent will have to pay 20 per cent of the taxable amount of the P11D value of the car. Equally, those who pay income tax at 40 per cent will pay 40 per cent of the P11D's taxable value. The payments are usually made as a deduction from your salary every month.

Company car tax example

So, if your company car has a £15,000 P11D value, you need to add the CO2 emissions tax by multiplying that according to the emissions category which applies, 15 per cent for example. This is your BIK value - in this case £15,000 x 15 per cent equals £2,250. Multiply that by your rate of personal tax according to your salary, for example £2,250 x 20 per cent equals £450. This is your annual company car tax.

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