Company-car tax explained
Everything you need to know about company cars, Benefit-in-Kind and how company-car tax is calculated
A company car is a valuable perk and choosing one can be very exciting. However, the potential tax implications must be considered carefully; choosing the wrong car can be an expensive mistake.
In principle, the amount of company-car tax you’ll pay depends on a combination of your salary, the cost of the car and the amount of carbon dioxide (CO2) it emits.
Current government policy is to encourage the adoption of electric cars (EVs), so company-car tax on zero-emissions vehicles is currently extremely low, regardless of your income.
The flip side of the coin is that high earners driving an expensive car with a high CO2 emissions figure pay the most. NOx (nitrogen oxide) emissions are also penalised, with older diesel cars paying an additional tax surcharge compared with their petrol counterparts.
How does company-car tax work?
HMRC sees the private use of a company car – even commuting – as a perk and refers to it as a Benefit-in-Kind (BiK). This essentially says that you’re receiving a financial benefit from your employer that isn’t part of your salary, so HMRC seeks to tax it separately (although it’s still deducted ‘at source’ from your monthly pay).
The tax is calculated by multiplying the company car’s P11D value, which is the sum of its list price, cost of delivery, VAT and any optional extras (but doesn’t include road tax or first-year registration fees), with a BiK rate. Every car on sale theoretically falls into one of the BiK bands, as they’re based on CO2 emission levels.
That calculation produces a figure that HMRC takes as the cash value of the ‘benefit in kind’ you are receiving from your employer, and you are taxed on that cash value according to your income tax band, be it 20%, 40% or 45% for the highest earners (income tax bands are different in Scotland, with a broader spread of rates from 19 to 41%.)
BiK percentage bands were originally based on company-car values, so drivers of expensive models were taxed more. Nowadays, BiK rates are grouped in bands according to a company car’s CO2 emissions, so the lowest polluters pay less as part of government policy to encourage motorists into greener cars.
In the current 2021/22 tax year, all fully electric cars are eligible for a 1% BiK rate, rising to 2% for the 2022/23 tax year. This is a huge subsidy and employees can save thousands of pounds annually when the companies they work for offer electric cars as company cars. Employers win too of course, as they’re charged National Insurance on employee BiK values. In other words if you pay less tax, so do they.
Company-car tax calculator: an example
P11D value(£s) x BiK rate(%) x Income Tax Band (%) = Annual tax payable
For any make, model and type of car, the above calculation is applied. As an example, let’s take a petrol BMW 3 Series that has a P11D value of £30,000 and falls into the BiK band of 25% due to CO2 emissions of 105g/km of CO2. The value of the car for company-car tax purposes is £7,500 (25% of £30,000).
If you live in England or Wales, the amount of company-car tax you pay depends on whether you’re a 20%, 40% or 45% income-tax payer. You’ll pay HMRC a percentage of £7,500 based on the rate of income tax you pay; in this case, either £1,500, £3,000 or £3,375 a year respectively.
Scottish residents are taxed in the same way, using Scottish income-tax rates of 19%, 20%, 21%, 41% and 46%. The amount of company-car tax you’ll pay to HMRC on £7,500 would be £1,425 at the lower rate rising to £3,450 at the highest rate. Most companies will deduct the tax due from your monthly salary, spreading the cost over the year.
BiK percentage bands are adjusted every financial year (this runs from 6 April to 5 April the year after), and the banding figures have increased year-on-year.
Tax on company provided fuel
If you use company provided fuel for personal miles - which includes commuting - then the HMRC will tax you on that benefit too.
Working out your fuel benefit tax liability is based on an HMRC-set ‘multiplier’ for your company car’s BiK percentage. The multiplier is currently £23,400, so for our notional BMW 3 Series example above you must multiply the car’s 25 per cent BiK rate by £23,400, giving a figure of £5,850.
This cash value is then multiplied by your income tax band, so a 20 per cent tax payer would have an annual bill of £1,170 deducted from their salary by HMRC. If you do very little private mileage - i.e. use less than £1,170-worth of petrol - it’s worth giving up the free fuel benefit, as you’ll be taxed the full amount regardless.
Electricity provided to recharge a company EV, whether at home or in the office, is not currently taxed as a benefit by the HMRC.
Other factors influencing company-car tax
What fuel your car burns also affects the amount of company-car tax you’ll pay. As discussed, most diesel cars face a BiK rate 4% higher than petrols. A high-mileage driver will usually recover the difference in terms of better fuel economy. On the other hand, if you’re a low-mileage driver, the petrol car may be the cheaper option.
Making financial contributions to your company car scheme will lower your BiK rate, while employees who use their car part-time are also liable for less BiK tax. To find out how much of a reduction in company-car tax you’re eligible for, use the company-car tax calculator on HM Revenue & Customs’ website: https://www.gov.uk/calculate-tax-on-company-cars
Changes to company car tax from 2020/21 onwards
In 2019, the Treasury announced that the BiK rates for the 2020/21 tax year would be replaced by two separate sets of rates; one for drivers of cars registered before 6 April 2020 and one for cars registered after that date.
This split separates cars that had their emissions tested under the old NEDC (New European Drive Cycle) testing from those that have been tested under the new WLTP (Worldwide Harmonised Light Vehicle Test Procedure) criteria, with the latter generally producing a higher CO2 reading. The most significant change for the 2020/21 tax year was the introduction of a 0% BiK rate for electric cars registered from 6 April 2020. This has now risen to 1% for the current 2021/22 tax year and it will be 2% in 2022/23.
These low rates have also been retrospectively applied to electric company cars registered before 6 April 2020, along with hybrid cars registered after this date that emit under 50g/km of CO2 and are capable of a pure electric range of 130 miles (at present, there’s no hybrid model on sale in the UK that meets this criteria).
From the 2023/24 tax year, BiK rates are due to be merged to realign them once WLTP emissions testing has been fully implemented. Drivers of older diesel-powered cars will still incur a 2% surcharge on their company cars, unless they meet the latest RDE2 testing criteria, which all new cars must do.
Company-car tax Benefit-in-Kind rates for 2021/22
To help you work out what your car's BiK rate is, we’ve listed the rates for cars registered after 6 April 2020 and for those registered before this date. Note that company-car tax rates are updated every year, so the BiK percentage you’ll pay this year will be slightly different next year.
Tax bands 2021/22 – Cars first registered after 6 April 2020
Tax bands 2021/22 – cars first registered before 6 April 2020
Some companies offer the choice of a car allowance as an alternative to a company car. This is essentially a cash amount given to you each month to help with your personal motoring costs. As with anything, there are advantages and disadvantages to this.
A company car is likely to be renewed every few years and it’s possible maintenance and any repairs are covered by the business, protecting you against any unexpected bills and hassle. If you choose a car allowance, you aren’t restricted to the list of cars offered by the company and can pay towards owning the car outright, or buy a used car.
A car allowance can also be tempting if you already own a car you wouldn’t mind keeping or have a commute where you’d rather not drive a car at all.