01908 210100|info@clm.co.uk Rental log in About Resources Blog Fleet Management Services Driver Information Contact Service Booking Log in Your Guide to Company Car Tax About to order your next company car? Read this first. Employer provided cars of all types remain one of the most popular benefits in the UK but the rules around tax can be confusing. Whether you’re in a traditional company car scheme, have the option of a cash allowance, or are part of an alternative scheme such as salary sacrifice, it’s important to know exactly how much you’ll pay depending on the car that you choose. This guide will take you through the latest tax rules and show you how to calculate the cost to you. If you can’t find the answer you’re looking for we’ll do our best to help, contact us to discuss further. To jump to the section that’s most relevant to you, use the links below: I get a company car with no cash alternative Read More I have the option to take a company car or a cash allowance Read More I intend to take a car under a salary sacrifice arrangement Read More Company Car Tax FAQs Read More If you are in a hurry and want a quick overview, here’s a short video: Company car drivers For those that drive a traditional company car, with no cash alternative, the rules are relatively straightforward. However, in selecting a new vehicle it is important to understand the financial impact of your choice of car. One of the key factors is the amount of CO2 the car emits per kilometre driven – the higher the emissions, the higher the rate of Benefit-in-Kind (BiK) tax paid. For drivers of diesel cars there’s also a 4% supplementary charge based on the P11D value of the car. The good news is that if you drive a modern, clean diesel that passes the new RDE2-certification for nitrogen oxide emissions, the supplement doesn’t apply. The maximum BiK rate for company cars is currently 37% of the vehicle’s P11D value. Click here for the full BiK tax rates tables to 2024/25 Calculating your company car tax The amount of company car or Benefit in Kind (BiK) tax you pay depends on the value of the car, its CO2 emissions, your personal tax rate and whether you forgo cash for the car either under a salary sacrifice scheme or as a cash allowance. Read more about cash allowance and car salary sacrifice scheme rules below. Calculating company car BiK tax can seem quite complicated but if you break it down into its components it’s easy to make sure that your choice of car fits your budget. The following section demonstrates how to calculate company car tax. How much company car tax will I pay? How much company car BiK tax you pay depends on four key criteria: The carbon dioxide (CO2) emissions per kilometre of your chosen car The value of the car when new, including any optional extras – this is known as the P11D value Whether you are a Basic, Higher or Additional Rate tax payer Whether you have access to the car all or some of the time and whether you make any personal contribution towards its cost We’ll take a look at each of these in turn. 1. Carbon dioxide emissions The Government uses CO2 emissions to decide what proportion of the car’s value is taxable. The more CO2 it emits per kilometre the higher the proportion of the car’s value is taxed. For example: A petrol car, registered before April 2020 and emitting between 60 grams and 64 grams of CO2 per kilometre will be taxed on 17% of its value in the 2020/21 tax year. A diesel car (that doesn’t meet RDE2 rules) emitting between 125 grams and 129 grams of CO2 per kilometre will be taxed on 34% of its value in the 2020/21 tax year. From April 2020, company cars producing no emissions will attract a zero percent Benefit-in-Kind (BiK) tax rate. The same rate will apply to vehicles producing between one and 50g/km of CO2, that are capable of more than 130 miles on battery power alone. It’s important to note that HMRC regularly revises the CO2 bands, meaning that the company car tax you pay may change over the life of the car. Click here for the full BiK tax rates tables to 2024/25. So, by choosing a car with lower CO2 emissions you may be able make a significant difference to your company car tax bill. For more information visit the HMRC website. 2. The value of the car (P11D value) The next thing to consider is the value of the car itself. P11D is actually the name of a form completed by employers and sent to HMRC to let them know about benefits employees have received. So, the P11D value of a car is the value that is included on this form. The P11D value of a car includes the list price, any factory fitted option, VAT, plus any delivery charges. It does not include the car’s first registration fee or its annual vehicle tax (VED). By choosing a vehicle with a lower list price, and by being selective in the number of options that you add, you can keep the P11D value down. 3. Your personal income tax band Another major factor in how much company car tax you will pay is your personal income tax band. The income tax bands for 2020/21 are as follows: Basic Rate tax payers – Up to £50,000 – 20% Higher Rate tax payers – £50,001 to £150,000 – 40% Additional Rate tax payers – Over £150,000 – 45% The higher the rate of tax you pay the more BiK company car tax you will be liable for, for any given car. For more information on tax bands visit the HMRC website. 4. Personal contributions and availability of the car If you make a one-off contribution to the cost of the car, this amount is deducted from the final BiK tax liability. In the same way, any payments made to your employer for the private use of a company car are deducted from the BiK tax charge. If you do not have access to your company car for a period of 30 consecutive days or more (for example, if your car is undergoing extensive repairs and you don’t take a replacement car), your BiK tax will be reduced in proportion to the amount of time you do not have use of it. To find out more about how personal contributions and availability affect your tax liability visit HMRC’s Company Car Tax calculator. Company car tax examples The following examples show how the P11D value of the car, its CO2 emissions, and the employee’s income tax rate are used to calculate the amount of Benefit in Kind (BiK) tax due. Note that for drivers of salary sacrifice cars, or those with a cash allowance alternative, income tax may be payable on the cash value rather than company car benefit tax. Example 1 VW Golf 8 R-Line 2.0 TDI 150PS 7-speed DSG 5 Door P11D Value – £29,635 CO2 Emissions – 99g/km – 27% of P11D value is taxed in 2020/21 (includes 4% diesel supplement) Employee’s income tax rate – Basic 20% To calculate the company car tax we use the following formulae: P11D Value x BiK CO2 Rate = BiK Value And then: BiK Value x Tax Rate = Annual Company Car Tax So in this example: £29,635 x 27% = £8,001.45 £8,001.45 x 20% = £1,600.29 Annual Company Car tax Or £133.36 per month Example 2 BMW 320i M Sport Saloon P11D Value – £35,465 CO2 Emissions – 149g/km – 32% of P11D value is taxed in 2020/21 (includes diesel supplement) Employee’s income tax rate – Higher 40% To calculate the company car tax we use the following formulae: P11D Value x BiK CO2 Rate = BiK Value And then: BiK Value x Tax Rate = Annual Company Car Tax So in this example: £35,465 x 32% = £11,348.80 £11,348.80 x 40% = £4,539.52 Annual Company Car tax Or £378.29 per month Example 3 Tesla Model 3 Standard Range Plus Auto P11D Value – £42,935 CO2 Emissions – 0g/km – 0% of P11D value is taxed in 2020/21 Employee’s income tax rate – Higher 40% To calculate the company car tax we use the following formulae: P11D Value x BiK CO2 Rate = BiK Value And then: BiK Value x Tax Rate = Annual Company Car Tax So in this example: £42,935 x 0% = £0 £0 x 40% = £0 Annual Company Car tax Or £0 per month Example 4 New Kia Niro Plug-In Hybrid P11D Value – £30,210 CO2 Emissions – 31g/km – 12% of P11D value is taxed in 2020/21 Employee’s income tax rate – Basic 20% To calculate the company car tax we use the following formulae: P11D Value x BiK CO2 Rate = BiK Value And then: BiK Value x Tax Rate = Annual Company Car Tax So in this example: £30,210 x 12% = £3,625.20 £3,625.20 x 20% = £725.04 Annual Company Car tax Or £60.42 per month To use HMRC’s company car tax calculator click here. Fuel costs and employer provided private fuel Another important cost that you will need to consider when selecting a new car is fuelling it for your private journeys. By choosing a car with lower fuel consumption you can pay less frequent visits to the pumps. However, you’ll also need to take into account whether the value of the car is higher and whether the type of fuel is more expensive. Fuel types Traditionally, diesel cars have delivered more miles to the gallon but have also had higher list prices (and therefore P11D values) than their petrol equivalents. Petrol and diesel fuel prices have also fluctuated, with diesel sometimes being the more expensive fuel. Improving petrol engine technology has closed the gap on diesel in recent years and you now also have a wide choice of alternative fuelled cars: Hybrids (HEVs), Plug-in Hybrids (PHEVs) and Battery Electric (BEVs). Battery Electric cars have the lowest fuel costs and are becoming increasingly practical as everyday transport, as journey ranges have increased and public charging stations become more widespread. Hybrids use supplementary batteries and electric motors to improve the overall efficiency of their internal combustion engines and these are becoming increasingly common on company car choice lists. Plug-in hybrids offer the opportunity to travel a certain distance on battery power alone, with the knowledge that you also have a conventional engine to take over beyond that range. These too have become popular as company cars, as their high fuel efficiency and low CO2 emissions mean lower BiK bills. For example, the MINI Countryman S E plug-in hybrid has an official combined consumption figure of 113.0-117.7 mpg and a CO2 rating of just 55-56 g/km. However, these figures are only achievable if the car’s batteries are frequently charged and it is driven, when possible, in electric only mode. Failure to use the car in this way can lead to very poor fuel consumption due to the extra weight of the electric drivetrain. It’s also worth noting that from the 2020/21 tax year BiK rates for pure electric and plug-in hybrid cars drop considerably, depending on the distance that they can travel on battery power alone. A petrol plug-in hybrid capable of 50 miles electric driving, and with CO2 emissions of 50g/km or less, attracted a BiK rate of 16% in 2019/20 but just 8% in 2020/21. Employer provided private fuel Where an employer offers to provide you with free fuel for your private journeys, you’ll need to calculate whether this benefit is greater than the extra BiK tax that you’ll have to pay. If you cover a lot of private miles it could be worth considering, if your private mileage is low it probably isn’t. To calculate how much BiK tax you’ll pay on free private fuel you use a similar method to working out your company car tax, but replace the value of the vehicle with the Fuel Benefit figure set by HMRC; for the 2020/21 tax year this is £24,500. Here’s an example: VW Golf GT 2.0 TDI 150PS 7-speed DSG 5 Door £24,500 x CO2 Emissions % x Income Tax Rate = Annual Fuel Benefit Tax £24,500 x 31% x 20% = £1,519 Annual Fuel Benefit Tax Use this calculator to work out the break-even private mileage for cars you might be considering. Tax rules for company cars where a cash alternative is offered From 6 April 2017 the rules changed for drivers who have the choice of a company car or a cash alternative. Previously, drivers who had this choice and chose to take a company car were taxed on the Benefit in Kind (BiK) value of their car. For drivers who ordered a new car before 6 April 2017, the existing tax arrangements stay in place until 5 April 2021 or until a ‘change in arrangements’ has taken place, this includes taking delivery of a new company car. Other drivers are now taxed either on the BiK value of their car or on the value of their cash alternative, whichever is higher. This means that drivers who select a car with a low P11D value, and/or a car with low CO2 emissions, may no longer benefit from a reduced tax bill as they may have to pay income tax on the full amount of their cash alternative. Drivers choosing an Ultra-Low Emission Vehicle (ULEV – cars emitting 75g/km CO2 or less) after 6 April 2017 are also be exempt from the tax changes. To learn more about the tax advantages of running a ULEV click here. So, in summary: Company car ordered before 6 April 2017 – no change until 5 April 2021 or upon replacement Ultra Low Emission Vehicle – no change Cash allowance option and take cash instead of car – no change Cash allowance option and take car – change – you will be taxed on whichever is the higher of these two amounts: the amount of your cash allowance or the Benefit in Kind value of your car. Cash allowance change example For a petrol car emitting 120 g/km with a P11D value of £20,000, the tax for 2020/21 would currently be due at your highest tax rate on £5,800 (list price of £20,000 x 29% CO2 band). If your marginal rate of tax was 40% you’d end up paying £2,320 in tax. Your employer would also pay class 1A NIC on the same value. If you had the option of taking a cash alternative of £6,000, under the new rules this would be taxed rather than the £5,800. So the tax you’d actually pay would be £2,400 rather than £2,320. However, if your cash allowance was just £4,000 the tax you’d pay would be calculated on the £5,800 BiK value, as in the first part of the example. Tax rules for car salary sacrifice schemes Prior to 6 April 2017, drivers who participated in a salary sacrifice scheme to take a company car were taxed on the Benefit in Kind (BiK) value of their car and, depending on the choice of vehicle, were able to make income tax savings by paying for the car out of their gross salary. Since then, with the exception of Ultra Low Emission Vehicles, drivers have been taxed on the higher value of either the amount of cash forgone or the BiK value of the car. This means that drivers who select a car with a low P11D value and/or a car with low CO2 emissions may no longer benefit from a reduced tax bill and will pay income tax on the full amount of the cash foregone. For drivers who ordered a new car before 6 April 2017, the existing tax arrangements stay in place until 5 April 2021 or until a ‘change in arrangements’ has taken place, this includes taking delivery of a new company car. Drivers choosing an Ultra-Low Emission Vehicle (ULEV – cars emitting 75g/km CO2 or less) after 6 April 2017 are also be exempt from the tax changes. To learn more about the tax advantages of running a ULEV click here. In summary: Salary sacrifice car ordered before 6 April 2017 – no change until 5 April 2021 or upon replacement Ultra-Low Emission Vehicle – no change New salary sacrifice car ordered on or after 6 April 2017 – change – you will be taxed on whichever is the higher of these two amounts: the amount of cash sacrificed or the Benefit in Kind value of your car. Click here to view our flow chart to help determine how you are affected Your Company Car Tax Questions Answered If you’ve got a question about company car taxation, it’s quite likely that we’ve been asked it before. Take a look at the Q&As below and, if you can’t find your question, submit it and we’ll do our best to provide a useful answer. Please note that we aren’t able to provide specific tax advice and you should consult a tax professional before making any decision. Does company car tax affect child benefit? In the UK, families are entitled to Child Benefit for children until they are 16 years old, or until they are 19 if they stay in approved education or training, and the HMRC is informed. Entitlement to Child Benefit is linked to earnings and where either parent earns over £50,000, there will be tax to pay on the benefit if they still chose to claim it. Depending upon how much over £50,000 is earned, the tax liability eventually erodes the value of the benefit altogether. The calculation for higher income doesn’t just take into account a parent’s actual salary, it also considers other benefits. If the value of the other benefits means the HMRC considers a parent to be a higher earner, they will face a tax bill and be required to complete a self-assessment. Company cars, or the value of cash allowances taken in lieu, are considered in calculating an individual’s exposure to income tax, and they have an impact on Child Benefit too. In order for high earning parents to make an informed decision about whether or not they continue to claim Child Benefit, the HMRC has developed a calculator that can be accessed here. Here are some examples based on the 2019/2020 tax year: Parent A B C Salary £35,000 £45,000 £55,000 P11d Value of car benefit £7364.50 £7364.50 £7364.50 Child Benefit Received £1076.40 £1076.40 £1076.40 Tax Charge To Pay £0 £247.00 £1076.00 Affected parents can make their own judgements as to the extend of benefits erosion and make an informed decision about whether to opt out, or continue to receive the benefit. How much tax do you pay on a car allowance? In answering, ‘How much tax do you pay on a car allowance?’, we have made the assumption that you’re referring to a monthly cash sum that you’ve opted for rather than taking a company car. This amount is simply added to your salary for income tax and National Insurance purposes, so the amount of tax you’ll pay on the allowance will depend on how much you earn in total. See the HMRC website for more details on income tax and NI rates and thresholds. How much should a company pay for car allowance? The answer to how much a company should pay as a car allowance isn’t simple, as this will vary considerably depending on the industry you work in, your role and the benefits policy of your employer. Generally speaking, organisations set company car cash alternatives at around the level that they would be willing to pay to lease a car that’s appropriate to your job grade. However, some organisations may choose to incentivise employees to take a car over cash, for health and safety or environmental reasons and this could skew the cash allowance downwards. Is car allowance taxable in 2020? The simple answer to the question, ‘Is car allowance taxable in 2020?’, is yes. If you choose to take a cash alternative to a company car you will be liable for National Insurance and income tax at your marginal rate on the full amount of the allowance. If you choose to forego the allowance and take a company car you will be taxed on the higher of the value of your cash allowance, or the Benefit-in-Kind value of the car. How is car allowance taxed in the UK? ‘How is car allowance taxed in the UK?’ is quite a straightforward question. Car allowance (assuming this is a cash amount payable in lieu of a company car) is treated as an additional amount of salary and you will be charged National Insurance and income tax at your marginal rate on the full amount of the allowance. How much will my company car cost me in tax? The answer to the question isn’t simple, it depends on a number of factors. These include: The CO2-based Benefit-in-Kind (BiK) tax rate that the car falls into. Click here to see the full BiK tax tables for 2019 to 2025. The value of the car, including any options – known at its P11D value. Your marginal (highest) income tax rate. Whether you have use of the car all the time and whether you make any personal contributions towards its cost Assuming you don’t make any contributions, and that you have access to the car all the time, the following formula is used to calculate how much you will pay: P11D Value x Benefit-in-Kind Tax Rate x Marginal Income Tax Rate = Annual Company Car Tax Liability Which car is best for company car tax? Understanding the tax implications of a company car is an important question, but you should also consider exactly what you need from your next car. This means assessing criteria such as the length and frequency of journeys that you make, how much room you need and if there are any specific features that you would require. When you’ve answered these, you’ll have a good idea of what type of car will be right for you and you can consider exactly which make and model will cost you the least in company car tax. The best place to start with this is by looking at the, CO2-based, Benefit-in-Kind (BiK) tax band that each car falls into. These vary enormously (from 0% to 41% of the car’s value in the 2020/21 tax year), so by choosing a car with the lowest possible CO2 emissions you can minimise your tax bill. Click here to see the full tables of BiK tax bands from 2019 to 2025. The other key factor is the value of the car itself, including any optional extras. The higher the total value, the greater the tax liability, so think carefully about which equipment you really need before ordering. How is tax calculated on a company car? If you want to know how the tax is calculated on a company car, you’ll need first to understand the formula that’s used to calculate the tax liability. This is: P11D Value x Benefit-in-Kind Tax Rate x Marginal Income Tax Rate = Annual Company Car Tax Liability Then, by plugging in the right variables, you’ll be able to calculate your annual company car tax bill. The P11D value will be available from the manufacturer’s website; don’t forget that you’ll need to add the value of any optional equipment specified to get the overall price. The website should also provide the car’s official CO2 emissions rating, you’ll need this to find the correct Benefit-in-Kind tax rate from the tables available here. How much does a company car add to your salary? To answer the question, ‘How much does a company car add to your salary?’, you’ll need to have made a decision about whether you’re going to take a company car or opt for a cash allowance. If you choose to take a cash allowance instead of a company car, this will be treated as an addition to your salary and both income tax and National Insurance will apply. If you take the car, you will be taxed on the higher of the value of your cash allowance, or the Benefit-in-Kind value of the car. So, the amount that a company car adds to your taxable salary varies depending on this choice as well as the value of the benefits on offer. Do you pay company car tax on electric cars? In the 2019/20 tax year the Benefit-in-Kind tax rate for Battery Electric Vehicles (BEVs) is 16%, but this falls to 0% in the 2020/21 tax year before rising again by 1% in the 2021/22 and 2022/23 tax years. For Plug-in Hybrid cars, the tax rate varies depending on how many miles the car can cover under battery power alone and its overall CO2 emissions. See the full Benefit-in-Kind tax table here. Can I deduct the purchase of a vehicle for my business? If the business outright purchases a new car then the amount that is tax deductible depends on the CO2 emissions of the vehicle. If the car has CO2 emissions of 75g/km or less, then the full amount of the purchase price is deductible in the first year. Cars emitting between 75 and 130g/km attract an 18% deduction and those over 130g/km an 8% deduction. For leased cars, in general terms, the rental payments for the vehicle are deductible as business expenses. For cars emitting more than 110g/km CO2 this is reduced by 15%. Note that there are proposals to extend the capital allowances and reduce the CO2 emission thresholds which, if approved, would be effective from April 2021. How are you taxed on a car allowance? Assuming your question refers to a cash allowance in lieu of a company car, the answer is simple: The cash sum is treated as an additional amount of salary and is subject to normal income tax and National Insurance rules. Choosing the right type of car for your mobility needs There’s a bewildering choice of new cars on the market, with a huge range of body styles, engine types and option packages available. It’s easy to get seduced by the ‘lifestyle’ promises of manufacturer adverts and lose touch with what you really need from your car. We’ve put together a quick guide that should help you to focus on what’s most important to you and your family, from journey types to safety features to brand image. It also contains a handy checklist that could narrow your search. If you need any additional information to help make any decisions around your next car, please contact us. 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