Company Car Tax Explained

When it comes to taxes of any kind, it’s probably fair to say that they can be a little tricky to wrap your head around, especially when it comes to car tax and the associated costs with a taxed car.

As well as tax on normal cars, you may have heard about company car tax, but if you’re feeling a little overwhelmed and you’re not really sure what it entails, our guide below about company car allowable tax and BIK rates can help to set the record straight with what you need to know.

What is company car tax?

If you’re provided with a company car by your employer and you’re permitted to use it privately for things such as family use or commuting, you will have to pay tax on it.

Keywords relating to company car tax:

Benefit-In-Kind (BIK) - this is a type of perk you get as an employee of a company that is not related to your salary, such as a company car.
BIK rate - the BIK rate is a taxable percentage of a company car's value. Usually, when a car has higher emissions, the BIK rate is usually higher too.
CO2 emissions - this is the amount of carbon dioxide that a petrol, diesel or hybrid car produces.
g/km - this value is how CO2 emissions are measured. It is the number of grams of CO2 produced for every kilometre the car drives.
P11D value - this is the total value of the company car, which includes the initial purchase price of the company car, plus VAT, delivery costs and any additional extras.

If you drive a van for work purposes, be sure to read our full guide to van tax.

What is a benefit in kind (BIK) tax?

A company car is just one of the types of Benefit in Kind perks that you might receive from your employer. Other types of BIK include things like accommodation, subscriptions and mileage allowance and of course, a company car, all of which are subject to BIK tax.

How does company car tax work?

As a company car is considered to be a Benefit in Kind, meaning that it is a work perk from your employer that isn’t related to your salary, it is subject to tax according to the taxable value of the benefit (in this case, a company car).

The government is responsible for determining how a company car is valued and there are two ways in which your employer can work out the taxable value of your privately used company car.

One way is to use a P11D form and the other is to work out the cash equivalent of the company car and then add it to your salary where it will then be taxed through payroll.

What is a P11D value?

A P11D is quite a complicated thing to get your head around as it relates to both a value and a form and it’s important to note that they’re not the same thing.

A P11D form is provided by your employer by the 6th of July following the end of the tax year that surmises the value of all the Benefit in Kind things you have received. The amount that is taxable on this form is determined by HMRC.

On the other hand, a P11D value is a sum of the company car’s value which includes the company car’s initial list price, any associated delivery costs, VAT and the first year’s car tax. Therefore, the higher the P11D value, the more tax you’ll pay on the company car.

What is a BIK rate?

You will need to know the company car tax band in order to work out the company car tax calculation. This is known as the BIK tax rate.

Read more: What is BIK Tax?

How is company car tax calculated?

Company car tax is calculated using several different figures and values, including:

The make and model of the company car.
The list price of the car, including any accessories.
How much CO2 it produces.
Whether it is a petrol or diesel car.
How many miles you drive and how often you use the company car.

What is included in a company car tax valuation?

The valuation of a company car benefit is calculated based on the following:

The current tax year.
How many approved CO2 emissions the car has.
The P11D value.
The initial list price of the company car.
Whether there is a cash alternative available.
How much the employee pays towards the cost of the car and any relevant accessories (known as employee capital contributions).
Whether the car is petrol or diesel.
When the car was registered.

So, the amount of company car tax you pay will be based on the above figures and uses the following formula:

P11D value (£) x BiK rate (%) x Income Tax Band (%) = Annual tax payable.

It seems like an incredibly complex formula and it appears that there are a lot of things to work out, but you can easily find further advice about company car tax and BIK tax on the government website or by asking your employer how much you’ll be expected to pay for company car tax.

How does company car tax work on electric cars?

While electric cars are exempt from paying Vehicle Excise Duty (VED), they are still subject to paying Benefit in Kind tax if they’re used as a company car.

However, fully electric cars that have zero emissions should be taxed at 0% and they shouldn’t pay any Benefit in Kind tax rate. This will be increased to 1% in 2021/2022 and to 2% in 2022 and 2023.

How can I reduce my company car tax?

There are several ways that you can reduce the amount of company car tax that you pay, including getting a company car with a lower P11D value, getting a car with fewer CO2 emissions or opting for a fully electric car if possible.

Electric cars usually come with some concerns as they have a high upfront cost, but they can help you to save money in the long run.

For more articles like this, see our related guides:

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