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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 choose a car model that will best suit your needs without costing too much...

A Hyundai Ioniq 5, a Tesla Model 3 and a Volkswagen ID.4

At its simplest, a company car is a vehicle supplied by an employer to an employee that can be used for private journeys as well as for work.

The employee gets a shiny new car or van, and the employer knows your work journeys are being undertaken in something modern and safe. It's a win-win – at least in theory.

Of course, there's no such thing as a free lunch (or, in this case, vehicle). You need to think carefully about the model you drive when deciding if a company car is right for you.

In this feature, we'll look at how the company car system works, and how you can get the biggest bang for your buck – in other words, the best vehicle for the lowest monthly cost – when choosing one.

Calculator

How does company car tax work?

If you’re one of the vast majority of company car drivers who use their vehicles for business and pleasure, it’s classed as a perk and you’ll be subject to benefit-in-kind (BIK) tax on it.

So how do you know how much you’ll pay in BIK tax? Well, first of all, you need to know your car’s P11D value, which is the list price, inclusive of VAT and delivery, but not including the first year’s road tax or the first registration fee. Any extras fitted to the vehicle need to be included in the P11D value.

Next, you need to know how much CO2 your new car emits (unless it’s an electric car of course, in which case the figure will be 0g). This is easy to find out by looking at the manufacturer’s website. Cars are classified in percentage bands according to the amount of CO2 they emit.

For plug-in hybrids (PHEVs), the all-electric range is a factor too. Essentially, though, the more expensive the car is and the more pollutants it emits, the more you pay.

For the year 2022/23, tax bands run from 2% to 37%. The rates are slightly different depending on whether the company car was registered before or from 6 April 2020. That's the date official CO2 output moved from NEDC test figures to the tougher WLTP testing protocol.

What about diesel?

Diesel was once the darling of company car drivers, but no longer. Diesel cars now face an even tougher emissions test, called Real Driving Emissions Step 2, or RDE2 for short. If they don’t meet this standard, they will be subject to a four-band taxation penalty, up to a maximum of 37%.

The good news is that all new diesel cars are RDE2-compliant, but vehicles registered before January 2021 are not, and will cost a lot more in tax. However, if you have a diesel hybrid it won’t be subject to the 4% surcharge.

Tesla Model 3 front

What about electric cars?

Electric vehicles are very attractive as company cars, and if charging up and keeping an eye on battery range fits your daily motoring needs, it’s a no-brainer.

Electric cars were subject to 0% BIK in 2020/21, but for 2022/23 that has risen to 2%, and that rate will remain in place until 2025. Despite the increase, someone with an electric company car will pay thousands of pounds less in company car tax each year than someone with a petrol or diesel.


Company car tax bands

Petrol, hybrid, plug-in hybrid and electric cars for the 2022/23 tax year. These rates will remain frozen until the 2024/25 tax year. For non-RDE2-compliant diesel cars which are not diesel hybrids, add 4% up to a maximum of 37%.

Cars registered after 6 April 2020

C02 emissions g/km Electric mileage range NEDC % 2022/23-2024/25 WLTP % 2022/23-2024/25
0 - 2 2
1-50 130 and above

2

2
1-50 70-129 5 5
1-50 40-69 8 8
1-50 30-39 12 12
1-50 less than 30 14 14
51-54 - 15 15
55-59 - 16 16
60-64 - 17 17
65-69 - 18 18
70-74 - 19 19
75-79 - 20 20
80-84 - 21 21
85-89 - 22 22
90-94 - 23 23
95-99 - 24 24
100-104 - 25 25
104-109 - 26 26
110-114 - 27 27
115-119 - 28 28
120-124 - 29 29
125-129 - 30 30
130-134 - 31 31
134-139 - 32 32
140-144 - 33 33
145-149 - 34 34
150-154 - 35 35
155-159 - 36 36
160-164 - 37 37
165-169 - 37 37
170 and above - 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
Mazda 6 long-term review petrol station

What about fuel?

If you do personal miles using fuel that your company has paid for, you’ll be taxed on it. Helpfully, HMRC has provided a ‘multiplier’ that relates to your company car’s BIK percentage. For 2022/23 the figure is £25,300, which you then multiply by your car’s taxation percentage.

After that, it’s a case of multiplying the resulting figure by your personal income taxation percentage (20% or 40%), which will give you your annual tax figure. This is where you need to work out if you’ll do enough personal miles to justify shelling out for the tax bill. If you do very few personal miles, it’s worth giving up the free fuel because you’ll pay less to fuel the car than you would in tax.

Seat Ibiza 2020 long-term filling up

What are the alternatives to a company car?

A different way of running a car through your employer is a salary sacrifice scheme. In return for a new car, you agree to take a lower salary, so you pay less income tax and National Insurance. However, the car is still deemed to be a benefit by HMRC, so you'll still pay tax on it. Rather than seeing salary sacrifice as an alternative to a company car, it's really a company car with slightly different tax arrangements. 

A genuine alternative to a company car is running your own personal vehicle on business. This is sometimes referred to as the 'grey fleet'. Your employer is likely to offer a cash allowance per mile travelled, or will cover the cost of fuel for business journeys. 

For an employee, the biggest benefit of running your own car on business is complete control over the car you choose to drive. What's more, you could also save money if you run an older, relatively cheap car. However, if you want to drive a new car, you will almost certainly pay more each month in finance payments than you would in BIK tax. 

You could also be offered a company car allowance by your employer. You'll pay tax on the allowance at your income tax rate, but you can then use what's left to buy the car you want. This is a big plus if your employer offers a limited choice of company cars.

Cheapest company cars

What's the difference between a pool car and a company car?

A pool car is only available for business use, and is shared between employees. Because a pool car is not a benefit, you won't be taxed if you have access to a pool car (as long as it's only used for work purposes).

Should I take a company car if my employer offers one?

All this talk of tax rates sounds rather expensive, but in reality you’ll pay much less in tax for a new company car than you would financing and running a car privately.

As with everything, the secret lies in being prepared. If you know how much you would pay each month for a private vehicle (and don’t forget to include servicing and running costs), you can compare that with the equivalent costs you’ll face for a company car.

There’s a quick and easy way to work out these costs – simply use our What Car? Company Car Tax Calculator. A few clicks will give you all the information you need.


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