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What is Company Car Tax?

A major consideration when looking at business leases, for both the business and the driver, is company car tax.

Also known as a Benefit in Kind or BIK tax, this is a tax that the driver of any company car which is used for personal use must pay.

As it is viewed as a benefit to the employee, the business must also pay class 1A national insurance, which is why many employers look at the BIK rates when deciding what vehicles can be offered as company cars.  

The tax is based on a number of factors including the vehicle’s emissions, the P11D value of the vehicle and when it is used. Scroll down to How is it Calculated? to see how the amount you will need to pay is worked out.

Why Do I Have to Pay This? 

Company Car Tax is applied to any vehicle provided to you by your employer.

This tax is applied to vehicles that you can also use for personal use, which includes driving to and from work, as they are seen as an additional benefit to your salary.

For vehicles registered after the 6th of April this year, fully electric vehicles will not be charged any company car tax, and it will only be increased to 1% in 2021/22 and then to a 2% rate in 2022/23.

How is it Calculated?

HMRC works out the amount of BIK tax you pay on a company car based on a number of factors.

The first factor is the amount of CO2 emissions the car emits. There are a range of bands that vehicles will be classed by, depending on how much CO2 they emit. The CO2 emission value is used to determine the vehicle’s company car tax rate.

The second factor is the P11D value. This is the price of the car, including and additional extras on the model but minus the non-taxable parts of the vehicle. Non-taxable aspects include things like the first year’s road tax and first registration fee.  The P11D is based on the manufacturer’s list price, so even you receive a discount on the vehicle, the P11D will remain the same.

The third factor is your personal tax rate, which is usually 20%, 40% or 45%.

To work out the amount you would pay on a car you will need to first multiply the P11D by the car’s company car tax rate.

For example, if a car has a P11D of £21,000 and a company car tax rate of 23% the BIK amount will be £4,830.

You will then need to multiply the BIK value by your personal tax rate to give you the amount you will need to pay.

So, if your tax rate was 20% you would multiply £4,830 by this to get £966. This will be the amount payable per year.

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If you’d prefer you can work out what your company car tax will be using the HMRC’s calculator.

Other Things to Consider:

Company Fuel Tax:

If your company also provides you with fuel to use then you may also need to pay company fuel tax. For more information please look at this Guide.

Company Car VS Car Allowance:

Your business may offer you a car allowance rather than a company car. If they offer you both it would be worth looking at the pros and cons of each to decide which is right for you. This guide should help you with this decision.

Changes to Emission Testing:

On the 6th of April the way that the emissions a vehicle produces are measured and rated will change. The introduction of the Worldwide Harmonized Light-Duty Vehicles Test Procedure (WLTP) is expected to change the CO2 rating of most vehicles sold in the UK.

The government has advised that for cars first registered after the 6th of April most company car tax rates will be reduced by 2ppt in 2020/21 and then increase by 1ppt in 2021/22 and another in 2022/23 to bring it back to the planned rates.

For more information on WLTP read this blog.

For more information on company cars you can look at our Guide to the Company Car, or if you would like to find out more information on the business leasing process then you might want to look at this guide.

You can always give us a call on 03302210000 if you have any questions and want to speak to one of our helpful Leasing Consultants.

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