Company car tax 2022: Benefit-in-Kind rates explained

Everything you need to know about company cars, Benefit-in-Kind and how company-car tax is calculated

Company-car tax explained

A company car can be an extremely attractive perk to any job, and it’s exciting to be able to select your new car. Yet before you rush in and choose your next set of business wheels, there are tax implications that need to be taken into account. If you choose the wrong company car it can be an expensive mistake, as the tax contributions come straight out of your payslip.

In basic terms, your company-car tax contributions are calculated on the cost of the car, the amount of carbon dioxide emissions (CO2) it produces and how much you earn.

With the government keen to encourage the adoption of electric cars (EVs), company-car tax on cars with zero tailpipe emissions is currently low, no matter how much you earn or how expensive the car is.

Top 10 best small company cars 2022

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 some diesel cars paying an additional 4% tax surcharge compared with their petrol counterparts.

How does company-car tax work?

2020 Jaguar I-Pace - rear dynamic view

In the eyes of HMRC, private use of a company car (that includes commuting) is a perk, and it is classed as a Benefit-in-Kind (BiK). This effectively means that you’re receiving a financial benefit from your employer that isn’t part of your salary, and HMRC therefore taxes it separately (Although it’s still deducted from your monthly pay ‘at source’).

HMRC takes the P11D value of your car, which is the sum of its list price, cost of delivery, VAT and optional extras (excluding road tax or first-year registration fees) and multiplies it with a BiK rate. Every car on sale sits within a BiK band, and they’re based on CO2 emission levels.

The result of this calculation gives HMRC a cash value of the ‘Benefit-in-Kind’ you are receiving from your employer and taxes it according to your income tax band, which may be 20%, 40% or 45% for the highest earners (this differs in Scotland, where there is a wider range of rates from 19% to 46%.)

Originally BiK percentage bands were based on company-car values, so the more expensive a model was, the more you were taxed on it. Nowadays, however, BiK rates are calculated in relation to a company car’s CO2 emissions, so the lowest polluting cars pay less. This is part of the government’s drive to encourage motorists into greener cars.

In the current 2022/23 tax year, all fully electric cars are eligible for a 2% BiK rate, and this is set to stay the same until at least April 2024. This is a huge subsidy and employees can save thousands of pounds annually when their employers offer EVs as company cars. 

Company-car tax calculator: an example

BMW 3 Series Touring

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 saloon that has a P11D value of £32,985 and falls into the BiK band of 33% due to CO2 emissions of 144g/km of CO2. The value of the car for company-car tax purposes is £10,995 (33% of £32,985).

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  £10,995 based on the rate of income tax you pay; in this case, either £2,199, £4,398 or £4,948 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 £10,995 would be £2,089 at the lower rate rising to £5,058 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 usually increase year on year, however for now they are due to stay steady until April 2024

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 set at £25,300 for the 2022/23 tax year, so for our notional BMW 3 Series example above you must multiply the car’s 33 per cent BiK rate by £25,300, giving a figure of £8,349.

This cash value is then multiplied by your income tax band, so a 20 per cent tax payer would have an annual bill of £1,670 deducted from their salary by HMRC. If you do very little private mileage - i.e. use less than £1,670-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 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 2% for the current 2022/23 tax year and will stay at this level until at least April 2024.

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 2022/23 and 2023/24

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, although the BiK percentage you’ll pay in 2022/23 will be changing in April 2024.

Tax bands 2022/23 and 2023/24 – Cars first registered after 6 April 2020

CO2 emissions (g/km)

Electric

range

(miles)

BiK rate (%)

Petrol,

Electric,

RDE2

Diesel**

Non-

RDE2

Diesel**

0

 

2

 

1-50

130+

2

 

1-50

70-129

5

 

1-50

40-69

8

 

1-50

30-39

12

 

1-50

14

 

51-54

 

15

 

55-59

 

16

 

60-64

 

17

 

65-69

 

18

 

70-74

 

19

 

75-79

 

20

24

80-84

 

21

25

85-89

 

22

26

90-94

 

23

27

95-99

 

24

28

100-104

 

25

29

105-109

 

26

30

110-114

 

27

31

115-119

 

28

32

120-124

 

29

33

125-129

 

30

34

130-134

 

31

35

135-139

 

32

36

140-144

 

33

37

145-149

 

34

37

150-154

 

35

37

155-159

 

36

37

160-164

 

37

37

165-169

 

37

37

170+

 

37

37

Tax bands 2022/23 and 2023/24 – cars first registered before 6 April 2020

CO2 emissions

(g/km)

Electric

range

(miles)

BiK rate (%)

Petrol,

Electric,

RDE2

Diesel**

Non-

RDE2

Diesel**

0

 

2

 

1-50

130+

2

 

1-50

70-129

5

 

1-50

40-69

8

 

1-50

30-39

12

 

1-50

14

 

51-54

 

15

 

55-59

 

16

 

60-64

 

17

 

65-69

 

18

 

70-74

 

19

 

75-79

 

20

24

80-84

 

21

25

85-89

 

22

26

90-94

 

23

27

95-99

 

24

28

100-104

 

25

29

105-109

 

26

30

110-114

 

27

31

115-119

 

28

32

120-124

 

29

33

125-129

 

30

34

130-134

 

31

35

135-139

 

32

36

140-144

 

33

37

145-149

 

34

37

150-154

 

35

37

155-159

 

36

37

160+

 

37

37

Car allowance

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 that maintenance and any repairs will also be 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.

For the best company cars you can buy, see our list of best company cars, or if your other car isn't a company car, read our guide to car tax for private owners.

More on UK car tax...

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