A company car is a new car for your exclusive use, with insurance and maintenance included. That's why it's seen as a major perk by the tax authorities.
As soon as you use a company car for a personal reason – and that includes driving to and from work – Her Majesty's Revenue and Customs (HMRC) views that as a taxable payment, or ‘benefit in kind'.
The Benefit-in-Kind (BIK) value that HMRC attaches to your car is a percentage of its list price, based on how much CO2 it emits. For tax purposes, this price is known as the ‘P11D value' because it's the value of your car as it appears on your P11D form – a document that your employer provides to HMRC detailing any benefits you receive in addition to your salary.
This P11D value is made up of the car's list price plus VAT, delivery and any options costing more than £100. The BIK amount is added to your salary and then taxed at your usual income tax rate.
It all means that if you run a company car, you're probably going to have to pay company car tax: but it also means that, because list price and CO2 emissions are integral to the tax calculation, as well as your personal tax rate, you can control how much this tax will be simply by choosing the right car.
Here's how you work out how much tax you're liable to pay on your company car:
1) Take your car's ‘P11D value' – the maker's list price plus VAT, delivery, numberplates and any cost options
2) Multiply that P11D value by the vehicle's company car tax rate (from a sliding scale depending on the car's official CO2 output, see below) to get your Benefit-in-Kind amount
3) Multiply that BIK amount by your personal tax rate (20% for taxable income up to £34,370*; 40% for income from £34,370-£150,000**) to get your company car tax payable.
To take a simple example, a car with a P11D value of £10,000 and a company car tax rate of 15% will have a BIK value of £1500. If your personal tax rate is 20%, your company car tax on this vehicle will be 20% of £1500 – £300 a year.
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