You may have wondered many times how company car tax works and whether it is worth having company cars offered to employees for use. True, it can be a great incentive for employees you want to retain in your business or for employees you need to travel to and from multiple locations. Even though all this sounds great, you should know how company car tax works, because it will affect the amount of tax paid both by you as employer and by the employee using the company car.
How company car tax works has to do with quite a few different factors, such as the list price of the car, the amount of CO2 emission, whether it is electric, hybrid or on traditional fuel, and so on. It would therefore be wise to know how company car tax works and be able to calculate the exact amount of tax you would owe HMRC for a company car before you actually buy it and offer it as company car to one of your employees.
1. The basics of how company tax works
As you already know, when we refer to a company car we mean a car that is provided by you as employer to be used by one of your employees for both private and business purposes, and of course for commuting.
When it comes to taxes, HMRC categorises a company car as a Benefit-in-Kind, which is usually referred to as BiK. A BiK is considered to be a non-cash benefit offered to an employee. Hence the equivalent monetary value of the BiK has to be calculated in order to know how much tax is owed to HMRC. Also, any fuel benefit offered to the employee is subject to tax.
There are two options for you to calculate how much tax is owed on the company car used by your employee:
Option one: You calculate the monetary value of the benefit (what the company car benefit means in pounds sterling) and you then add this amount to the employee’s salary. This means the employee will pay tax on the company car through PAYE (it will come off their payslip).
The downside of this option is that it may negatively impact the employee if their salary was close to the tax band threshold, because adding the monetary value of the company car benefit to their salary may push them above the tax band threshold, thus effectively making them pay more tax then they should.
Option two: You use a P11D form.
What is a P11D ?
Seeing that option one above has a serious downside, you may want to consider the second option, that of using a P11D form, which may be preferable.
A P11D form is a summary of all the benefits that an employee received from their employer; this includes, but is not limited to, company car benefit, fuel benefit, medical insurance, childcare vouchers, etc. The tax owed to HMRC on BiKs is then calculated globally for all benefits the employee receives.
As employer, you must provide to each employee to whom you offer Benefits-in-Kind a P11D form by 6 July following the end of the tax year. In this P11D form you will summarize the value of all BiKs an employee benefited from while in employment with your business. HMRC will use the information submitted in the P11D to calculate how much tax they are owed.
Back to the company car, the P11D must contain the following information:
- The list price of the car, including VAT and optional extras
- Delivery charges, excluding the registration fee
- The first year of car tax
Obviously, the higher the value of the company car declared on the P11D, the higher the amount of tax that will have to be paid.
3. What is included in the company car tax calculation ?
You can use a company car and fuel benefit calculator to gather how much tax the company car elicits. To use this calculator, you will need to include information about your employee’s other income as well as tax information, because this will be taken into account in order to get the right amount of tax due.
The information you will need to have at hand before using the company car and fuel benefit calculator is as follows:
- The tax year the company car benefit relates to
- The make and model of the car
- The date of registration of the car
- The car’s CO2 emissions
- The list price, including VAT and accessories (minus employee contribution towards the car)
- Type of fuel used by the car
- The P11D value
- How often the car is used
Please note that BiK rates are different for cars registered before and after April 2020, when the way of measuring emissions was changed.
4. How do you calculate the tax owed on the company car ?
In brief, the amount of tax owed on a company car is calculated by multiplying the P11D value by the CO2 emission bracket it falls into, which gives you its Benefit-in-kind (BiK) value.
Then, the BiK value is multiplied by whatever income tax bracket the employee’s salary is in. This is either the basic rate of 20% tax on earnings over £12570, or the Higher Rate tax band of 40% for those earning more than £50271 annually, or the 45% tax rate on earnings of £150000 or more a year.
5. Can I reduce my company car tax ?
One way of lowering your company car tax rate is to provide an electric car. An electric vehicle (EV) has a BIK rate of only 2% for 2022 – 2023, fixed until 2025. This reduces the tax rate to just a few pounds per month. You have to be mindful though that electric charge stations are not yet as easy to find as traditional ones.
Another way of reducing the company car tax bill is a plug-in hybrid vehicle (PHEV), which runs on a combination of traditional fuel and an electric motor. The PHEV BiK rate is dependent on the car’s C02 emissions as well as electric range. Cars producing lower emissions and with a longer range can qualify for a lower BiK percentage.
The most expensive company cars to tax are high-emitting, high-fuel use cars, as HMRC has become increasingly tough on emissions in recent years. Those top emission-generating vehicles can cost up to three times as much in tax as electric or hybrid cars of the same value.
If the tax on a company car is too high to be of much overall financial benefit, employers may consider offering a cash alternative to cover the cost of a personal car, with a fuel allowance paid per mile travelled, or covering the fuel costs for business journeys instead.
These alternatives give employees the choice of which car they run and could save them money versus using a company car if they drive an older or cheaper car. However, newer models are likely to top up higher monthly finance payments than the amounts imposed by BiK tax.
6. How is company car fuel calculated ?
Some employers choose to pay for the fuel used by the company car, both for business and personal use. This is considered a ‘taxable benefit’ in the same way that a company car would on which the employee will have to pay tax.
To work out how much tax is owed on the company car fuel, you multiply the BiK tax rate by a flat amount set by HMRC. For the tax year 2022 – 2023, this is set at £24600.
For example, fuel provided for a car in the 37% bracket would entail tax paid on £9102. If the employee is on a 40% tax rate, this would cost £3640 a year. If your income tax is set at 20%, you might expect to pay around £1800 in tax on that fuel.
Please note that fuel tax is applied regardless of whether your employee spends £1 of company money on personal car fuel or £1,000,000, because the BiK charge is a fixed amount. This is why, unless the employee uses the car for private journeys covering tens of thousands of miles each year, it makes more economic sense to pay for the fuel themselves. However, if the employee drives a car with a low emission rate for many miles annually, it would be cost-effective to pay the tax on company-provided fuel.
Now might be the ideal time to engage the services of an accountant to do all the work for you and provide you with all the tax advice you need.
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