Complete Guide to Company Car Tax

Ryan Patrick

• 8 min read
Complete Guide to Company Car Tax

Are you a small business owner in the UK looking to buy or lease company cars for your workers or yourself? If this sounds like you, it's crucial to understand what leasing a company car means in terms of taxes. Please spare a few minutes to read our Incorpuk insightful guide as we walk you through making wise business decisions and how to purchase or run these vehicles.

What is a Company Car?

An employer provides a company car to his employees for official and personal use.

The perk is presented to employees who travel extensively for work-related purposes. In the past, employees had limited choices on company cars, but today, employers offer a list of approved vehicles for workers.

Some businesses offer employees a company allowance instead of the vehicle itself. Thus, employees can choose between a company car and a company allowance.

Will I pay for my company car? You don't have to pay for your company car because your employer already did. However, employees who receive benefits above their salary must pay a Benefit-In-Kind (BIK). BIK (company car tax) is a contribution from employees who use company cars privately. Each vehicle has a BIK percentage banding based on the carbon dioxide emissions and form P11D stating its value (list price, extras and VAT).

How Company Cars Work

For an employee to qualify for a company car, they must be employed permanently and have a specific need or purpose for the vehicle. Regardless of why a company must provide an employee with a car, it should be fine for their salary. In other words, the salary should stay within the national minimum wage. Here's how the process of company cars works out:

  • Choose a company car from those listed by the company.
  • The employer gets a quote for your chosen car - including maintenance and insurance.
  • A check determines the employer's credit check and financial status to secure a business lease for the company car in question.
  • Once everything is settled, the car is approved, and the order is finalised.
  • The car is delivered to the team member, who then takes responsibility by signing relevant paperwork and acknowledging the company car scheme and associated payments.

Understanding Company Car Tax

Company car tax, or Benefit in Kind (BiK) tax, is the money an employee pays to use a company car for private purposes. Although employers meet the cost of a vehicle above the team member's salary, a company car is considered a financial benefit. As a result, the extra income is subject to taxation depending on the car's value. BiK tax rates are calculated depending on the factors below:

  • Car list price
  • Fuel type
  • Emissions
  • Age
  • Engine size
  • Employee's personal tax bracket - employees, directors or business owners who use company cars for business and personal use are subject to this tax.

HMRC determines BiK tax rates, which are recorded on form P11D, including the monthly deductions from a team member's salary. You can calculate accurate company car tax estimates using the HMRC's car or car fuel benefit calculator.

Common Company Car Tax Terms

  • BiK (Benefit-in-Kind) - the tax on a perk provided by an employer to an employee, like a company car
  • CO2 (carbon dioxide) - air pollutant emitted by cars whose engines are fueled with petrol or diesel and is measured in grams per kilometre (g/km)
  • BiK rate - the percentage taxed on a car's value. The higher the CO2 a car emits, the higher its BiK rate.
  • NEDC (New European Driving Cycle) - the procedure of measuring car emissions and fuel economy (old test)
  • WLTP (Worldwide Harmonised Light Vehicle Test Procedure) is the current economy and emissions test procedure. New cars registered after September 2019 fall under WLTP.
  • RDE2 (Real Driving Emissions, Step 2)—These tests take place on the road alongside the lab-based WLTP assessments. RDE2 sets more stringent emission limits than RDE1, the previous standard.
  • Diesel surcharge - diesel company cars that fail to comply with the RDE2 element of WLTP tests attract a 4% hike in BiK compared to petrol-engined counterparts.

How to Minimise Your Company Car Tax Bill

Can I minimise my company car tax? Minimising company car tax is a significant concern for many employees. These strategies will help you lower your tax liability when choosing a company car:

  • Choose a car with low emissions. Vehicles with low or zero emissions have lower BiK rates, which directly impact the tax charges.
  • A pool car - Vehicles only used for business travel aren't subject to tax charges. Hence, a business can claim 100% VAT on lease agreement instalments.
  • Avoid optional extras—Any additional features that increase a car's value will raise BiK tax payments. Thus, avoiding them will lower your tax bill.
  • Choose a pickup truck or van - Most vehicles in this category are classified as light commercial vehicles, meaning they're subject to standard BiK rates, saving you money.
  • Take a business edition fleet—Some car manufacturers offer different prices to companies that make large car orders, reducing the overall BiK value.

How Much Company Car Tax Does an Employer Pay?

The National Insurance Contributions (NIC) is what an employer pays for the company car tax for the company. It's considered a benefit for the car. The company car tax is 13.8% and is paid annually through the PAYE system. Company car tax is paid on or by July 21 every year unless the car benefit is part of the monthly payroll and is taxed monthly. While an employer pays NIC on a company car, an employee doesn't pay.

How Much Company Car Tax Do Employees Pay?

An employee who uses a company car pays a Benefit in Kind (BiK), which is considered a benefit. The total they pay depends on their individual tax status: basic rate or higher rate taxpayer.

BiK is considered taxable income, in addition to the salary and dividends where applicable. It can be processed alongside the payroll, and if not, a notification will be sent to HMRC to amend the employee's tax code.

BiK can also be paid after being declared on the annual Self-Assessment tax return. However, this approach is only applicable in the first year of declaration, and afterwards, HMRC adjusts the employee's tax code for future payments.

The self-assessment tax return or the tax code must be adjusted if the company car benefit changes significantly (like a replacement within the year). However, once changes take place, HMRC must be notified. The company and employees continue to pay car benefits annually, whether on the payroll or not. Plus, it's important to note that the benefit can vary annually even when the car remains the same.

How to Calculate Company Car Tax

The company car tax is calculated similarly, regardless of how a car is purchased (leasing, financing, hire purchase). The company car tax on electric vehicles is 2%, much less than petrol and engine cars.

You should consider switching to an eclectic or hybrid car. They have zero emissions, explaining why their car tax is so low, and the law is constant for the next three years, 2022/23/24/25. That's why electric cars are a better choice for companies, provided the users don't cover high mileage daily.

The Pros and Cons of a Company Car

Company cars are suitable for a business but have ups and downs.

The Pros of a Company Car:

  1. Get a brand-new car every three or four years
  2. You're not responsible for depreciation costs as a team member
  3. Servicing, repair, and insurance are covered
  4. Choosing low-consumption cars means better running costs
  5. You don't need financing to get a car
  6. Low Benefit in Kind (BiK) - company car taxes

The Cons of a Company Car:

  1. Limited car choices
  2. You pay more taxes, especially if the company car uses petrol or diesel. BiK is lower for EVs, but it still impacts your salary taxation.
  3. There is little room for flexibility, like having a child, whenever circumstances shift.
  4. You don't own the car.
  5. You have to pay fuel benefit tax.

How a Company Car Allowance Works

A company car allowance is the money an employer gives a team member instead of a car. The company works out the money it would have spent on the vehicle, then provides an employee with the money in small portions. These payments are paid to the employee monthly as part of their gross salary (pre-tax). In return, they expect you to source and finance a vehicle with this money.

Pros:

  1. The employee exercises the freedom of choice.
  2. Choose to lease or purchase a car.
  3. Income boost
  4. Potential profit

Cons:

  1. The financial responsibility is yours
  2. The allowance is reduced after taxation
  3. You're responsible for operating costs - insurance, fuel, service, maintenance, road tax
  4. High mileage can leave you out of pocket

Difference Between a Company Car and a Car Allowance

An employer provides a company car to an employee for business or private use.

On the other hand, a car allowance is money given to an employee by the employer instead of a car. The company assesses how much a car would cost and then pays the same amount to the employee in small portions above their salary. The allowance is paid monthly above the gross salary, which allows the employee to choose the kind of car they need and pay for it.

What is Expected of a Company that Uses a Company Car?

HMRC requires companies to declare annually on form P11Db about the company car. The form must be submitted by July 6 of each year. The employee using the company car receives a form P11D, which must be submitted by the same date. These forms can be processed online.

Whenever a company gives an employee a company car or replaces it, the company must notify HMRC. The notification to HMRC must be done when the vehicle is benefited to the employee by submitting form P46, or it is processed through payroll and actioned before April 5.

If you're new to filing these forms, an accountant or payroll provider can provide more information, or you can visit GOV.UK website for more details.

Frequently Asked Questions

Will I pay tax on company car fuel?

Depending on the circumstances, employees or employers may have to pay tax on company car fuel. For a company that provides fuel, any personal mileage, including commuting, is a benefit. HMRC sets the fuel benefit calculator, which is currently at £25,300 multiplied by the car's BiK percentage annually.

What is BiK car tax?

Benefit in Kind (BiK) is a tax above your salary on benefits or perks offered by your employer and is commonly known as company car tax. A company car is considered an employee benefit, so you have to pay tax on the Benefit in Kind.

What is a reasonable car allowance?

We recommend a minimum of £300 per calendar month if the maximum mileage allowance is offered (currently, in 2024, this is 45p per mile for the first 10,000 miles and 25p after that). We recommend a minimum of £350 PCM if a lower mileage allowance is offered.

In Summary

Whether you decide to take the company car or the car allowance, it's crucial to research both options. A company car is subject to a company car tax known as Benefit in Kind (BiK), and it can be used for business and private purposes.

What HMRC regards as a perk of the job will increase your taxes, but you can change this by opting to use an Electric Vehicle (EV) and saving money. You can choose between a fuel-engine, electric, or hybrid vehicle. Fuel-engine vehicles pay higher BiK since they have more emissions, while EVs pay a lower BiK because they have zero emissions.

On one side, a company car is viewed as a financial burden, while others view it as good value as it reduces operating costs and responsibilities. A company car allowance, on the other hand, is also subject to taxes, meaning you may end up with less in the end. Do you have any questions on company car tax? Kindly contact one of our experts here.