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Understanding The Tax On Your Company Car

By raccars Published

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You may think a company car is a great job perk - until you try to get your head around the complications of company car tax...

VED is calculated differently on company cars from private vehicles, where it is based on CO2 emissions. While emissions are still taken into account for company car tax, you also have to factor in the list price of the car plus any optional equipment, the type of fuel it uses, how the car has been paid for and how it is used.

A company car is classed as a 'Benefit in Kind' (BIK) on top of your basic salary, which means it is subject to taxation by HMRC. The HMRC website has a helpful calculator tool to help you work out your company car tax liability.

Your company car will be taxed on a rate decided by its CO2 emissions and as a percentage of its P11D value (the list price including options but excluding non taxables, such as the first year's VED and initial registration cost). Using the car on a part time basis or contributing to the initial cost will reduce its P11D value.

There are 30 different CO2 emissions bands which apply to company cars. The cleanest models are taxed at 5%, while the most polluting vehicles receive a BIK rate of 35%. Rates change according to the tax year, so previously exempt electric vehicles will earn a 5% BIK tax rate from April this year. Diesel powered company cars are taxed at 3% more than petrol cars due to the polluting effect of the particulates they produce. So unless you cover a lot of mileage, petrol cars often work out cheaper for BIK buyers.

Your company car tax rate will also depend on your salary. Those paying income tax at a rate of 20% are liable for 20% of the P11D's taxable value. Forty per cent tax rate payers will pay 40% of the taxable part of their car's P11D value. This is usually taken at source from your monthly salary.

So your tax can be calculated by taking the P11D value of your company car, for example £15,000, and multiplying it by the CO2 band which applies - again as an example, 15% - to determine your BIK value. In this case, the result is £2,250. Multiply that by your personal tax rate, so let's say 20%, which in this case, means your company car tax comes to £450 per year.

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