How to calculate company car tax

The 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. Below we explain how to calculate your company car tax and how to minimise it where possible.

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 puts out. 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 including VAT, delivery and any options costing more than £100; alternatively, you can view it as the manufacturer’s ‘on the road’ price minus the £55 standard registration fee for every new car and the first year’s road tax, if any. 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 going to have to pay company car tax. However, since the car’s list price and CO2 emissions are integral to the tax calculation, you control how much this tax will be simply by choosing the right car.

Calculating your company car tax

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, number plates and any cost options; alternatively, take the On the Road price and take away the £55 registration fee and the cost of the first year’s road tax, if any.


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 the BIK amount by your personal tax rate (20% for taxable income up to £32,010; 40% for taxable income from £32,011-£150,000*). The result is what you'll pay annually in tax for your company car.  

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, ie £300 a year.

*Most workers receive a tax-free allowance of £9440 (the figure for the 2013-14 tax year) before tax is applied, although this can be affected by personal financial circumstances. There is a personal tax rate of 50% for incomes above £150,000.

 



Company car tax rates

Even cars emitting as little as 1g/km CO2 are subject to company car tax; only those with zero emissions (currently purely electric cars) go free. 

The Government adds an extra 3% penalty to diesel cars emitting more than 75g/km CO2 because diesels tend to release a greater quantity of harmful particulates and gases; diesel hybrids are exempt from the surcharge, however. The diesel surcharge reduces for vehicles that emit between 205 and 214g/km, and is removed for those that generate more than 215g/km. 

 

Company car tax bands for the 2013-2014 tax year

(The 3% surcharge for diesel cars is shown in brackets where applicable.)


CO2 emissions
(g/km)
% of P11D to
be taxed
 
0 0
1-75 5
76-94 10 (13) 
95-99 11 (14)
100-104 12 (15)
105-109 13 (16)
110-114 14 (17)
115-119 15 (18)
120-124 16 (19)
125-129 17 (20)
130-134 18 (21)
135-139 19 (22)
140-144 20 (23)
145-149 21 (24)
150-154 22 (25)
155-159 23 (26)
160-164 24 (27)
165-169 25 (28)
170-174 26 (29)
175-179 27 (30)
180-184 28 (31)
185-189 29 (32)
190-194 30 (33)
195-199 31 (34)
200-204 32 (35)
205-209 33 (35)
210-214 34 (35) 
215 or more 35 (35)

 

Minimising your company car tax

• Some manufacturers charge a lot for options, so considering a car with more standard equipment to start with may be more tax-efficient than adding expensive optional extras at ordering time.

• If your employer offers to pay for your fuel, that’s another taxable benefit. The tax is calculated by multiplying your company car’s tax percentage by a flat rate of £21,100; the result is then added to your salary to be taxed at your personal income tax rate. 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.

 

 

The wind of change

Company car tax rates change every year, so it’s worth having a little forward knowledge to help you make a choice that’s at least a little future-proof. The Government's pledge to announce any future changes to company car tax rates three years in advance will also make it easier to plan ahead. Here are some of the changes that the Government is likely to make for the next few years:

Tax year 2014-15

• Maximum percentage will remain 35% but will include cars from 210g/km.

• The fuel benefit multiplier (used to calculate tax on any fuel if you receive this as an additional benefit from your employer) will increase by the rate of inflation. Currently, the multiplier is set at £21,100 - this is multiplied by your company car's tax rate according to its CO2 output, to calculate your taxable annual fuel benefit. 

Tax year 2015-16

All cars emitting 0-50g/km CO2 will be subject to 5% tax

All cars emitting 51-75g/km CO2 will be subject to 7% tax

Top tax rate will go up to 37% for cars of 210g/km and over.

Tax year 2016-2017

All cars emitting 0-50g/km CO2 will be subject to 9% tax

All cars emitting 51-75g/km CO2 will be subject to 11% tax