If you’re looking to get a company car, then you have probably come across the term company car tax more than once.
The chances are, if you’re going to have a company car or a van that you can take home then you will have to pay company car tax, it’s just a fact of life. Or, living in the UK. Anyway, there’s a lot to company car tax and it can be confusing if you’re new to it. Even if you aren’t, the changes to company car tax that are coming into effect in April 2017 are important, and it’s vital that you know how they will impact you.
This is our ultimate guide to company car tax which contains all essential knowledge on company car tax.
What is company car tax?
Firstly, what is company car tax? It’s pretty self-explanatory really, you get a Benefit-in-Kind (BIK) from your company (your car) and you have to pay a tax on it. How much you pay will depend mainly on how much CO2 your company car emits, the P11d and which tax bracket you are in. If you are in the higher tax bracket, then you will have to pay more in company car tax. But, we’ll go into more detail later.
Company car tax is essentially a form of income tax that once upon a time was based on the price of the car and the mileage. It was in 2002 that the way we measure company car tax changed to how much CO2 a car emitted. This was in an attempt to encourage companies and drivers to use cleaner vehicles, and it worked, as you will learn in a bit.
When do I have to pay company car tax?
If you are using your company car or van for personal mileage, including travelling to and from work, then you will have to pay company car tax. The only exemptions are;
- If you are a Partner of a Partnership
- A Member of a Limited Liability Partnership (LLP)
- You own your own business (sole trader)
You are also exempt if the company car has been adapted for mobility reasons. Or, if you are not doing personal mileage or it is a ‘pool car’. So, if you leave your company car on the business premises overnight and only use it strictly for business reasons such as meeting clients, then you don’t have to pay company car tax.
How is company car tax calculated?
If you’ve established that you do in fact have to pay company car tax then you’ll need to know how it’s calculated.
Essentially, the amount you will pay will depend on the P11d value of the car, the CO2 emissions and your personal tax bracket. The lower the P11d value and the emissions = the lower your company car tax will be. You can find out exactly how much you will pay on websites such as comcar. But, this is how you can do it yourself;
- Take the P11d Value
- Multiply that by your company car tax rate – this will give you your benefit in kind (BIK) rate
- Multiply your BIK rate by your personal tax rate (either 20% or 40%) – this is how much you will pay in company car tax.
This year (2016), the government announced some major changes to the BIK rates on cars. This includes more bandings for lower emission cars which could end up costing you more than it would if you got your car before April 2017. We’ve provided the new BIK rates below for reference.
The 2016 Autumn Statement and your company car
We mentioned that company car tax was changed to be based on emissions in an attempt to get companies to invest in cleaner, more efficient vehicles. And it worked, and company cars are now cleaner and more environmentally friendly than ever. Which was great news for you, your company, and our lovely planet. But, it wasn’t so great for company car tax. When the bandings were introduced in 2002, there were very few efficient cars on the roads, therefore there didn’t need to be that many bandings for low emission cars.
Now there are way more low emission cars on our roads which has resulted in the government introducing more bandings. There are eleven more bandings for low emission cars under the new BIK rates. These will be introduced in 2017.
Zero emission cars will be taxed 2% and those emitting between 1g/km and 50g/km of CO2 will be taxed between 2%-14%.
There will also be changes to salary sacrifice schemes, which will impact you. A salary sacrifice scheme is essentially where an employee ‘sacrifices’ part of their salary for a benefit, such as gym membership, a mobile phone or a company car. Currently, these aren’t taxed very much, if at all. However, after April 2017, these will be taxed the same as your regular salary.
This means that your company car will either be taxed by the BIK rate or by income tax and your National Insurance Contributions, whichever is higher. The only exemptions are ultra-low emission vehicles. You can find out everything you need to know about ultra-low emission vehicles here.
The BVRLA have said that this will unfairly target drivers with low emission (but not ultra-low emission) cars as their BIK rates are going to be significantly lower than their salary sacrifice scheme allowance. You can read their full statement here, and OSV’s here.
Which cars are the best for low company car tax?
Obviously, the best cars for company car tax under the new rules are the fully electric, ultra-low emission vehicles. The only thing is, electric cars aren’t for everybody, and ultra-low emission vehicles are pretty pricey. Unless you were planning on spending 100k on a BMW i8 to get you to work and back.
It is also worth considering whether van tax is efficient, we explore in more detail here.
But there are cars that will cost less than others, these include cars such as;
You may also be wondering whether the fuel type has an impact. Well, you can find out in our article “Which is best for company car tax: Petrol or Diesel?”
What are the worst cars for company car tax?
Basically the ones that are going to emit the most CO2. For example;
Who pays for company car tax?
Both you and your employer pay for company car tax. And as we mentioned earlier it will come out of your salary the same as ordinary tax so you won’t have to worry about paying for it. However, we recommend you talking to your HR if you have any other queries.
You can find out how to calculate company car tax here.
So that’s company car tax. You pay for it like normal tax, and it is based on both your personal tax banding and how much CO2 your car emits. It is changing, however, and you could end up paying significantly more for your company car if your BIK rate is lower than your income tax and national insurance contributions.
In relation to company car tax, you may also find the below of use:
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