Running A Car - Company car tax
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.
Currently, the maximum company car tax rate is 35% (for vehicles emitting more than
215g/km of CO2). Electric vehicles are exempt from company car tax, but only until 2015, at which point they'll be charged at 13%.
Company car tax bands 2013-2014
Figures for diesel cars with 3% surcharge are shown in brackets.
Zero emission vehicles – 0%
1-75g/km – 5%
76-94g/km – 10% (13%)
95-99g/km - 11% (14%)
100-104g/km – 12% (15%)
105-109g/km – 13% (16%)
110-114g/km – 14% (17%)
115-119g/km – 15% (18%)
120-124g/km – 16% (19%)
125-129g/km – 17% (20%)
130-134g/km – 18% (21%)
135-139g/km – 19% (22%)
140-144g/km – 20% (23%)
145-149g/km – 21% (24%)
150-154g/km – 22% (25%)
155-159g/km – 23% (26%)
160-164g/km – 24% (27%)
165-169g/km – 25% (28%)
170-174g/km – 26% (29%)
175-179g/km – 27% (30%)
180-184g/km – 28% (31%)
185-189g/km – 29% (32%)
190-194g/km – 30% (33%)
195-199g/km – 31% (34%)
200-204g/km – 32% (35%)
205-209g/km – 33% (35%)
210-214g/km – 34% (35%)
215g/km or more – 35% (35%)
Minimising your tax hit
Besides charging all company car for their CO2 output, the Government adds an extra 3% penalty to diesel cars because they tend to release a greater quantity of harmful particulates and gases. This diesel surcharge reduces for vehicles between 210-219g/km, and disappears for those over 220g/km. It will be removed entirely in April 2016, when new Euro VI standards will require diesels' cleanliness to come in line with that of petrol cars.
Some manufacturers charge a lot for options, so considering a car with more standard equipment to start with might be more tax-efficient than adding on expensive optional extras at ordering time.
If your employer offers to pay for your fuel, that's another taxable benefit. If your annual mileage is relatively low, you might be better off paying for your own fuel.
Besides opting out of the fuel, you can opt out of the company car altogether and take the cash alternative. Handing back a car that's costing £265 a month in company car tax will typically add around £5500 to your annual salary. It sounds good until you realise that this £5500 is taxed, leaving a 40% taxpayer with just £3300 to spend. From that you'll have to pay your own insurance, maintenance and road tax. It is possible to run a new car for this money, but you'll need to shop around.
What to expect next
Tax year 2014-15
•76-99g/km band will be divided into bands of 76-94g/km and 95-99g/km.
•First tax rate above zero and 5% cars will start at 11%, for cars at 76-94g/km.
•Maximum percentage still 35% but will include cars from 210g/km.
Tax year 2015-16
•No more extra-low rates for zero- or low-emitting cars: 13% for all cars with 0-94g/km CO2.
•Top tax rate up to 37% for cars of 210g/km and over.
Tax year 2016-2017
•Another 2% rise in company car tax percentages.
•Diesel surcharge removed.
*Most receive a tax-free allowance of £8105 before tax is applied, although this can be affected by personal financial circumstances.
** 50% for income above £150,000.