Company Car Tax
An explanation of company car tax and how it affects you
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's 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's used. Scroll down to How's it calculated? to see how the amount you'll 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're seen as an additional benefit to your salary.
The BiK rates range from 2% for zero and low-emission vehicles, all the way up to 37% for higher polluting vehicles. For cars that are pure electric, the BiK rate is currently fixed at 2% until April 2025. From this date onwards, the BiK rate will increase by 1% every year until it hits 7% in 2028. From April 2029, the BiK rate will increase to 9%.
How's 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 and which CO2 band the vehicle is classed by. 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 any additional extras on the model, minus the non-taxable parts of the vehicle which 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 if 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 due on a car you'll 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'll then need to multiply the BIK value by your personal tax rate to give you the amount you'll 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.
If you’d prefer, you can work out what your company car tax will be using our Company Car Tax Calculator.
Other things to consider:
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.
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.
In April 2020, the government implemented a change in the level of CO2 emissions used to calculate tax rates and the previous NEDC standard was replaced with the current WLTP figures.
As a result, the BIK rate you'll use will depend on whether your vehicle was registered before 6 April 2020, or from 6 April 2020.
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'd 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.