Finding the right car for your needs and budget is never an easy task, but if you’re lucky enough to be one of the UK’s 840,000 company car drivers then that decision can also have a massive impact on your tax bill too.
Company cars have been a top-tier workplace perk for decades. They’re a tool of the trade for jobs with regular travel needs and very attractive for employees – who get a brand new, fully maintained car, paid for by the business, but available for them to use outside work hours.
Naturally, there is a cost. His Majesty’s Revenue & Customs (HMRC) classes company cars as a ‘Benefit-in-Kind’ (BiK for short), which a term for any perks provided on top of your salary. And, just like the rest of your pay packet, they’re taxable.
The amount of company car tax you’ll pay depends on the vehicle you choose and how much you earn. But, beneath the jargon, it’s relatively easy to figure out how much it’ll cost, and what steps you can take to keep a lid on your bills.
How does company car tax work?
Company car tax isn’t a linear system in the UK, and there are a few factors that can significantly alter the amount you’ll pay.
HMRC assigns what’s called a ‘taxable value’ to every company car, which is a percentage of the list price based on its tailpipe CO2 emissions and, for plug-in hybrids (PHEVs), how far it can drive on battery power.
The list price (known as the P11d) includes optional extras, VAT and delivery charges but not the registration fee or the first year of vehicle excise duty (VED, or road tax). It’s also fixed for life, so it doesn’t reflect discounts for new cars and there’s no driver incentive to opt into a used one.
Drivers then pay BiK on that taxable value at the same rate as their income – typically 20%, 40% or 45% in England, Wales and Northern Ireland (Scotland has its own rates). For example, a 20% income taxpayer would be liable for 20% of their vehicle’s taxable value each year, split into instalments and recovered from their monthly wages.
In short, the cheaper the vehicle and the less CO2 it emits, the lower your tax bill.
Which tax band does my company car fit into?
You’ll need two pieces of information for this; CO2 emissions at the tailpipe and, if you’re considering a PHEV, the electric range. Most manufacturers and leasing companies have online configurators which will give the exact figures you need. If not, ask your fleet manager.