A company car is considered a taxable perk by HMRC.
Officially a company car is known as a Benefit In Kind (BIK), because there is a monetary value attached to your ability to use it privately. As a result, the value of the car is added to your taxable salary, you pay additional tax and the company pays Employer’s NIC.
The easiest way of calculating how much tax you will have to pay on a company car is to visit the HMRC website – https://www.gov.uk/calculate-tax-on-company-cars .
HMRC works out the amount of BIK tax you pay based on the amount of CO2 emissions a car emits. There are several emissions bands and each is allocated a percentage value which is multiplied by the car’s list price, HMRC refers to this as the P11D value. Additional percentage points are also added if the vehicle has a diesel engine.
How much company car tax will I pay?
The amount of company car tax you pay is dependent on your annual salary. For example, if you fall into the Basic Rate Income tax bracket, you’ll pay 20% tax on the car’s P11D value. Those in the High Rate Income tax bracket pay 40%.
Company car tax calculator example
Here’s how to calculate your company car tax in three simple steps:
- Take your company car’s P11D value (for example £35,000)
- Multiply this value by the car’s company car tax rate which is dependent on CO2 emissions (for example 19%) to get your BIK amount (£6,650)
- Multiply this BIK value by your personal tax rate – 20% or 40%. This will be the amount of company car tax payable. So:
£35,000 x 19% = £6,550 (BIK amount) x 20% = £1,330 per year in additional tax
Remember that the company also has to pay Employer’s NIC. Therefore:
£35,000 x 19% = £6,650 (BIK amount) x 13.8% = £917.70 per year in additional NIC
If the company pays for fuel there’s additional tax to pay on this benefit. We normally assume that you will be paying for the fuel personally and reclaiming a mileage allowance on actual work journeys undertaken. Note, the mileage allowance for company cars is at a reduced rate, depending on the engine size and fuel type.
Corporation Tax Savings
The company will own the car and therefore can claim capital allowances which would reduce Corporation Tax (the car would be eligible for writing down allowance of 8% of the cost price on reducing balance basis over a number of years).
If you lease a ‘qualifying car’ for business purposes the company will normally be unable to recover 50% of the VAT charged.
A leased vehicle will also not be ‘owned’ by the business and therefore cannot be sold if the company needs to raise capital.
However, the company can claim the monthly lease payments as a business expense.
In short, when it comes to company cars, it makes sense for SMEs to choose leasing over ownership, because of the benefits of tax relief and VAT-reclamation. However the monthly costs may be higher so it’s worth running comparison calculations to see which figures work the best for you.
Commercial Vehicles have different rules!
If you drive a van or pick-up truck then you may not have any additional tax to pay. We have a different blog post on this topic here: https://a4cgroup.co.uk/news/van/
Get in Touch
When it comes to company cars, there is no ‘one size fits all’ and so we aim to give you as much information as possible so that you can make an informed decision based on your circumstances.
Of course, if you wish to discuss any of the information contained within this guide then don’t hesitate to get in touch.