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Company car guide

A company car sounds like a great perk, but it can also be a big expense; follow our tips to choose the best car and pay the least company car tax

Words ByClaire Evans

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Are you getting the best deal from your company car? A new car without any outlay, or the need to pay for insurance or maintenance might sound like a dream come true for many hard-pressed motorists – but is it actually costing you more than you save?

It sounds ideal, but you need to choose a company car with your eyes open. If your job demands you spend a lot of time on the road, chances are you'll automatically be supplied with the company's standard model, but you may also be offered a wider choice.

Some employers will give you the option to 'upgrade yourself' by letting you make a cash contribution to the car, or you could even get a rebate if you take a cheaper car.

Even if you're a senior executive, the list of new cars available may incorporate restrictions on CO2 or safety ratings (to help keep down leasing costs).

How is company car tax calculated?

For most company car users, the biggest downside is the tax you'll have to pay on the 'benefit' of having a car. As soon as you use the car for a personal reason – which includes driving to and from work – Her Majesty’s Revenue and Customs (HMRC) sees it as a taxable payment or benefit in kind.

The benefit in kind rate that HMRC attaches to your car is a percentage of its P11D price, based on how much CO2 it emits. The lower the car’s emissions, the lower the rate of BIK; for example, a zero emission car has a rate of 7% and a car with high emissions will attract a rate of 37%.

The P11D value is made up of the car's list price plus VAT, delivery and any options costing more than Β£100. To calculate your benefit in kind tax, multiply the car’s P11D value by the percentage that applies to its CO2 emissions. Then you’ll need to multiply that figure by the income tax band you are in: either 20% or 40%. This will give you the amount of tax that will be deducted from your wages.

As an example, a BMW 318i SE saloon with a P11D value of Β£25,525 and emissions f 124g/km will have a company car tax rate of 21%. That means the benefit in kind tax is Β£5360, which will equate to a cost of Β£1072 for a 20% taxpayer and Β£2144 for a 40% taxpayer.

Fuel – to pay or not to pay?

Your employer might offer to pay for all your fuel, but do your sums before you accept, because this counts as another benefit, which means you'll have to pay tax on it.

If you don’t do that many miles, it may be cheaper for you to pay for your own fuel. The next question is do you choose a diesel, petrol, hybrid or electric vehicle as your company car.

Make sure you study our What Car? True MPG figures as part of your research - these give the best indication as to what a car will achieve in the real world, as opposed to laboratory test conditions.

Next > Check your company car tax rate

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