Company car tax guide

A company car can be a great perk, but it pays to choose wisely to keep your tax bill low. Here's how to pick a car that suits your needs and your pocket...

Tesla Model 3 parked with BMW 3 Series and Jaguar XE

Choose wisely, and a company car is almost too good to be true. Your employer pays for the car, including the cost of maintenance and insurance. You drive a brand new car for a fraction of what it would cost to buy the same model outright or lease it yourself.

Make a mistake, though, and you could pay hundreds more in tax than you need to, and saddle yourself with a car that doesn't really suit your needs.

To make the right decision, you'll need to understand how to play the system.

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How does company car tax work?

If your employer offers you a car as part of your pay and benefits, then you must pay tax on it. Unless it is used exclusively for work purposes, HMRC sees the car as a benefit, so benefit-in-kind (BIK) tax has to be paid. The money will be taken from your pay packet each month.

How much you pay depends on the value of the car and how much carbon dioxide (CO2) it produces. For plug-in hybrid vehicles (PHEVs), the all-electric range is also a factor. But essentially, the more expensive the car and the more it emits, the more you pay.

You'll be taxed at your income tax rate on a percentage of the car's P11D value. This is the list price, but excluding the first year's Vehicle Excise Duty and the registration fee.

Tax bands run from 0% to 37% in 2020/21, 1% to 37% in 2021/22, and 2% to 37% in 2022/23. And yes, we do mean 0%. Some drivers really are paying nothing in company car tax in the 2020/21 tax year to run an electric vehicle (EV) like the Renault Zoe or Tesla Model 3.

The tax rates are slightly different depending on whether the company car was registered before or from 6 April 2020, as this is when the car's official CO2 output moved from NEDC test figures to the tougher WLTP protocol.


Company car tax bands from 6 April 2020 

Cars registered after 6 April 2020

CO2 emissions g/km... Electric range...  2020-21... 2021-22... 2022-23...
0 n/a 0 1 2
1-50 >130 miles 0 1 2
1-50 70-129 miles 3 4 5
1-50 40-69 miles 6 7 8
1-50 30-39 miles 10 11 12
1-50 <30 miles 12 13 14
51-54   13 14 15
55-59   14 15 16
60-64   15 16 17
65-69   16 17 18
70-74   17 18 19
75-79   18 18 20
80-84   19 20 21
85-89   20 21 22
90-94   21 22 23
95-99   22 23 24
100-104   23 24 25
105-109   24 25 26
110-114   25 26 27
115-119   26 27 28
120-124   27 28 29
125-129   28 29 30
130-134   29 30 31
135-139   30 31 32
140-144   31 32 33
145-149   32 33 34
150-154   33 34 35
155-159   34 35 36
160-164   35 36 37
165-169   36 37 37
170 or more   37 37 37

Cars registered before 6 April 2020

CO2 emissions g/km... Electric range... 2020-21...  2021-22...   2022-23...
0 n/a 0 1 2
1-50 >130 miles 2 2 2
1-50 70-129 miles 5 5 5
1-50 40-69 miles 8 8 8
1-50 30-39 miles 12 12 12
1-50 <30 miles 14 14 14
51-54   15 15 15
55-59   16 16 16
60-64   17 17 17
65-69   18 18 18
70-74   19 19 19
75-79   20 20 20
80-84   21 21 21
85-89   22 22 22
90-94   23 23 23
95-99   24 24 24
100-104   25 25 25
105-109   26 26 26
110-114   27 27 27
115-119   28 28 28
120-124   29 29 29
125-129   30 30 30
130-134   31 31 31
135-139   32 32 32
140-144   33 33 33
145-149   34 34 34
150-154   35 35 35
155-159   36 36 36
160 or more   37 37 37

Tesla Model 3 front studio

How can I cut my tax bill?

You want the short answer? Drive an electric car.

Tax changes introduced on 6 April 2020 saw the tax rate for electric vehicles (EVs) drop from 16% to 0%. For 2021/22, the rate is 1%, rising to 2% the following year. These gift-horse tax rates are intended to accelerate the uptake of EVs, and with UK sales of electric cars nearly trippling in 2020, they're clearly working.

With a broader choice of models, improving infrastructure, and better range, the downsides to running an EV as a company car are diminishing. However, high-mileage drivers may still be put off by the need to recharge, and the supply of EVs remains limited. It may also cost more to lease a suitable EV for your needs than your company is willing to pay.

So, if you want to keep your tax bill sensible but an EV isn't an option, there are other ways. One is to consider a plug-in hybrid. These have tax rates of 2%-14%, so long as they emit less than 50g/km of carbon dioxide. The distance the car can travel on battery power determines where a PHEV sits within the 2%-14% band. Because no hybrids on sale currently have the range to qualify for the lowest tax rates, the 10% or 12% bands are most likely.

Another is to choose an RDE2-compliant diesel. Since January 2021, the RDE2 emissions standard applies to all new cars, and diesel vehicles which make the grade don't attract the 4% benefit-in-kind surcharge that applies to other diesels. Because diesel cars generally have much lower emissions than the equivalent petrol, an RDE2 diesel will be cheaper to tax, and cheaper to fuel. Our True MPG test shows the kind of economy you can expect in real-world conditions.

Land Rover Discovery Sport 2020 left panning

What are the most expensive cars to tax?

Just as low-emission vehicles attract the lowest tax bills, so thirsty, high-emitting cars are the most expensive. Over the years, HMRC has steadily toughened the rules, so a car doesn't have to be an out-and-out gas-guzzler to land its driver with a high tax bill.

In 2021/22, cars with CO2 emissions of 170g/km or more sit in the top 37% tax band, and so cost roughly three times as much in tax as a plug-in hybrid of the same value. That means the likes of the Land Rover Discovery Sport sit in the top tax band for almost all versions, except for the plug-in hybrid and a couple of front-wheel-drive models.

It's not just about emissions. The higher the P11D value, the bigger the cut that will be taken from your salary each month. Don't forget, the cost of options is included, so specifying lots of extra luxuries will push up the tax payment.

Think about the type of car you choose, too. Some SUVs can make fine company cars, but the equivalent executive saloon will generally have a lower CO2 figure, and so a lower BIK banding.

Mazda 6 long-term review petrol station

What about fuel?

If your employer pays for all your fuel, including private journeys, then this is another taxable benefit.

Is it worth having free fuel if in reality it's not 'free' at all? Well, it largely depends how far you drive, and how much your car emits. HMRC uses a fixed amount (for 2020/21, it's £24,500) and then multiplies it by the tax banding of the car you drive. So free fuel for a car in the 37% bracket would mean paying tax on £9065. For a 40% taxpayer that means waving goodbye to £3626 per year. Unless a company car driver covers tens of thousands of private miles annually, in this example they will be better off paying for their own fuel.

The sums are more likely to add up for a high-mileage driver with a low-emitting car.

Seat Ibiza 2020 long-term filling up

Can I use my own car on business instead?

Yes. If you use your own car you can claim expenses for the miles you cover on business. For the first 10,000 miles each financial year up to 45p per mile can be claimed, dropping to 25p per mile after 10,000 miles. What's more, as you'll pay less in tax than if you drove a company car you'll be able to put this saving towards running your own car.

However, you'll need to pay for servicing, maintenance, and insurance yourself. As a rule, anyone considering an EV or hybrid will be better off with a company car rather than running one privately. The financial equation will be more closely balanced for those running a thirsty, high-emitting car.

It's worth comparing the leasing rates that are available to private individuals before making a final decision.


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