Are you a small business owner in the UK looking to buy or lease company cars for yourself or your employees? If so, it is important to understand the various tax implications of using a company car. This guide from IN Accountancy will explore how company car tax works and how certain decisions around buying and running these vehicles can affect your bottom line.
What is a benefit in kind?
A benefit in kind (BIK) is a tax chargeable on the benefits an employer provides beyond a salary, including company cars and fuel for those cars, upon which income tax is charged. Company car tax calculations are based on the make, model and list price of the vehicle as well as its fuel type and level of CO2 emissions. The government’s drive towards greener transport methods means that emissions are now the main influencing factor behind company car tax legislation.
How does company car tax work?
Tax on company cars is calculated based on the type and value of the car. First, HMRC takes into account the P11D value of the car, which is the sum of its list price, VAT, delivery costs and any optional extras. Next, the P11D value is multiplied by the BIK rate for that vehicle (based on its CO2 emissions) to provide a cash value for the benefit in kind. Finally, this cash value is added to the employee’s salary and the total is taxed using the relevant tax band.
What about diesel & electric cars?
For diesel and electric cars alike, company car tax is calculated based on the CO2 emissions of the car. A percentage is calculated according to the grams per kilometre (g/km) of CO2 the vehicle emits. Based on the new, more stringent and soon-to-be de facto Worldwide Harmonised Light Vehicle Test Procedure (WLTP), zero and low-emission electric cars are currently taxed at 2%, with the most polluting vehicles taxed at the highest rate of 37%.
The 2% BiK rate on low emission vehicles is set to remain in place until April 2025, and then increase by 1% per annum each year until April 2028.
In other words, the company car tax on electric cars is significantly lower than on diesel cars and most petrol models. Although, high-mileage diesel drivers will likely recoup some of the difference thanks to better fuel economy.
How is company car tax calculated?
To illustrate how the tax on company cars is calculated, a company car that was newly registered in 2022 with a P11D value of £25,000 and CO2 emissions of 117g/km (28% BIK tax rate based on current WLTP figures) equates to a benefit in kind cash value of £7,000. Based on the basic rate (20%), higher rate (40%), and additional rate (45%) tax bands, the company car tax owing on that vehicle would either be £1400, £2,800 or £3,150, respectively.
The same system applies in Scotland, except with slightly different income tax bands ranging from 19% to 46%. It’s also worth noting that tax on company cars is deducted from the employee’s monthly pay ‘at source’.
Employers will also pay Class 1A National Insurance Contributions of 15.05% on the benefit in kind amount, so £1,053.50 in this example.
Can I reduce my company car tax?
There are really only a couple of options to consider if you wish to reduce your company car tax bill. The first is to choose a car with lower emissions, which will result in a lower tax rate. As we’ve noted, Electric cars are subject to the least tax for company cars. However, given their high price and limited range, hybrid vehicles represent a good halfway house. The second way to reduce company car tax is by purchasing cars with lower P11D values.
Do you pay tax on company car fuel?
Yes, you or your employees may need to pay tax on company car fuel, depending on the circumstances. If the company provides fuel, then any personal mileage (including commuting) would be a benefit in kind. HMRC sets an annual car fuel benefit multiplier, which is currently £25,300, multiplied by the company car’s BIK percentage.
So, using the earlier example, multiplying the company car’s 28% BIK rate by £25,300 would give a cash value of £7,084. Therefore, a basic rate taxpayer would have £1,417 in company car fuel tax deducted from their salary.
How about tax on a company van?
Tax on a company van is different to regular company car tax. Company vans are taxed at a fixed rate with the BIK tax rate for the 2022/23 tax year set at £3,600. So, for a basic rate taxpayer, company van tax would be £720. Sole traders or anyone using a company van solely for business are usually exempt from paying company van tax.
As with car fuel benefit, HMRC also sets an annual flat rate fuel benefit multiplier for vans. This rate is currently set at the much lower level of £688.
Navigate company car tax with IN Accountancy
HMRC charges tax on company cars, which is calculated based on the car’s value, CO2 emissions, and earnings. Electric cars currently provide business owners and employees with significant tax breaks as the government seeks to transition from diesel vehicles to electric and hybrid models. Fuel for private journeys is also subject to this so-called benefit in kind (BIK) taxation. However, commercial vans are subject to slightly different rules.
At IN Accountancy, we understand how complex and confusing company car tax can be. This is why we offer comprehensive support and advice to small and medium-sized business owners to better understand the options. As a result, we can ensure that your company complies with all the relevant legislation and makes the most of any potential tax savings. So contact us today on 0161 456 9666 or email firstname.lastname@example.org for advice.