How Is Company Car Tax Calculated?

Providing a company car can be a valuable employee benefit, but it also comes with tax considerations for both businesses and employees. Understanding company car tax is important when choosing vehicles for a fleet and setting a company car policy.

The amount an employee may pay depends on several factors, including the vehicle’s value, its emissions and the employee’s income tax rate.

But how is company car tax calculated in practice? This guide explains the main factors businesses and employees need to understand.

What is company car tax?

Company car tax is a tax charged when an employee has access to a company car that they can also use for private journeys.

The tax is based on the vehicle’s benefit in kind tax value. A Benefit in Kind is a benefit provided by an employer that has a taxable value. This means the car is treated as an employee benefit, rather than simply a work vehicle.

If an employee uses a company car for business purposes only, different rules can apply. However, where private use is allowed, the benefit will normally need to be reported to HMRC.

Company car tax is paid through the employee’s income tax. The amount they pay tax on will depend on the value of the benefit and their personal tax rate.

How is company car tax calculated?

The basic calculation for company car tax uses three main factors:

P11D value × BIK rate × income tax rate

The P11D value is broadly based on the vehicle’s list price, along with certain options and other relevant costs. It is not simply the amount the business paid for the vehicle.

The BIK rate is then applied to this value. The benefit in kind BIK rate is linked to the vehicle’s CO2 emissions and fuel type.

Finally, the taxable benefit is considered alongside the employee’s income tax rate to work out how much tax they may need to pay.

For example, a higher-value vehicle with higher emissions may have a higher taxable benefit than a lower-emission vehicle. This is why vehicle choice can have a direct impact on the cost of providing a company car.

What are company car tax rates?

Company car tax rates are set by the government and can change between tax years. The rate that applies to a vehicle depends largely on its CO2 emissions.

This means businesses should not assume that the same vehicle will always have the same tax treatment. When reviewing a fleet, it is important to consider the rates that apply for the relevant tax year.

The vehicle’s BIK rate is particularly important when comparing different company cars. A small difference in the rate can have a noticeable impact on the tax paid over the course of a year.

Businesses should also check the latest government guidance before making decisions based on specific car tax rates.

How do electric cars affect company car tax?

Electric cars can have different tax treatment from petrol and diesel vehicles because their CO2 emissions are lower.

Fully electric company cars have historically benefited from lower BIK rates, although these rates can change over time. This can make electric vehicles an attractive option for businesses looking to manage employee tax costs while also reducing fleet emissions.

Plug in hybrid vehicles are treated differently. Their BIK rate can depend on factors including CO2 emissions and electric range.

For businesses considering a move to electric or hybrid vehicles, it is therefore important to look beyond the vehicle’s purchase price or monthly lease cost. The tax position can also form a significant part of the overall cost.

What does company car tax mean for businesses?

Company car tax is mainly paid by the employee, but it can still influence an employer’s fleet strategy.

The choice of company cars can affect the overall cost of an employee benefit package. It can also influence which vehicles employees are willing to choose from a company car list.

Businesses should consider factors such as:

• Vehicle lease costs
• BIK tax
• CO2 emissions
• Fuel type
• Employee requirements
• Mileage
• Running costs
• Fleet sustainability targets

Tax is only one part of the decision, but it is an important one. Choosing vehicles with lower emissions can help businesses offer an attractive employee benefit while managing the tax position for employees.

Other employee benefits and tax

Company cars are not the only benefits that businesses may need to report. Depending on the circumstances, other benefits such as mobile phones, private medical insurance or certain cash benefits may also have tax implications.

Employers may need to report benefits provided to employees to HMRC. Some benefits may be tax free under specific rules, while others can create an additional tax charge for the employee.

This is why businesses should take a wider view when reviewing their employee benefits and fleet policies.

Why company car tax matters when choosing a vehicle

Understanding company car tax before choosing a vehicle can help businesses make better fleet decisions.

A car with a low monthly lease cost may not necessarily be the most cost-effective choice once its tax position, emissions and running costs are considered. Equally, a higher-value vehicle could still offer good overall value if its BIK rate and operating costs are favourable.

For this reason, businesses should consider the complete cost of a vehicle rather than focusing on one figure.

Toomey Leasing Group can help businesses review their vehicle requirements and explore suitable leasing options. Whether you are providing a single company car or managing a larger fleet, our team can help you consider factors such as vehicle choice, mileage, lease costs and employee requirements.

If you are reviewing your company car policy or considering new vehicles for your business, speak to Toomey Leasing Group to discuss your requirements.