As an employee who uses a company car for personal purposes, including commuting, you'll need to pay a tax known as the 'Company Car Tax'. This tax is treated as a 'Benefit-in-Kind' (BiK), which is a benefit that is not included directly in your salary but is still treated as taxable income. The tax is deducted from your pay slip and paid through the PAYE (Pay As You Earn) system.
In this guide, we'll delve deep into how the Company Car Tax works, how it's calculated, the factors that affect it, and ways to potentially reduce your tax liability.
What is Company Car Tax?
Company Car Tax, also known as Benefit-in-Kind (BiK) tax, is a tax levied on employees who use a company car for private purposes. This tax is seen as a perk of the job and is thus subject to taxation. It's important to understand that the tax is not charged on the entire price of the car, but on its taxable value, which depends on several factors.
Factors Determining Company Car Tax
Several key factors go into determining your tax liability on a company car:
CO2 Emissions
The CO2 emissions of the vehicle play a significant role in determining the tax rate. Cars with higher CO2 emissions are subject to higher tax rates, encouraging the use of environmentally friendly vehicles.
Car's List Price
The list price of your company car, including optional extras, factors into the calculation of the tax. The higher the price of the car, the greater the tax.
Your Contribution
If you contribute towards the cost of the car, this reduces your tax liability.
Availability of the Car
If the car is available to you part-time or only for a portion of the year, your tax liability is reduced accordingly.
Your Income Tax Bracket
Your personal income tax bracket is another crucial element. The higher your income, the more tax you'll pay on your company car benefit.
How Company Car Tax is Calculated
The Company Car Tax is calculated by taking the list price of the car, multiplying it by the BiK rate based on CO2 emissions, and then multiplying this result by your tax bracket.
For example, if a £40,000 car emits 100-104g/km of CO2, it attracts a 25% BiK rate. The taxable BiK amount will be 25% of £40,000, or £10,000. If you fall into the 20% tax band, you would pay 20% of that £10,000 (£2,000), spread across the financial year.
Understanding BiK Rates
BiK rates are determined by the CO2 emissions of the car and are set on a sliding scale ranging from 2% to 37%. Cars with lower CO2 emissions have lower BiK rates. Electric cars, for instance, attract the lowest BiK rates and are therefore taxed at the lowest percentage rate.
Company Car Tax and Fuel
If your employer pays for any of the fuel you use for your company car, you will be liable to pay Fuel Benefit tax. This tax is calculated based on the average cost of a company car, the BiK rate your company car attracts, and a number of other variables. Note that electric cars do not attract this tax.
Reducing Company Car Tax
There are ways to reduce your company car tax liability. Choosing an electric or hybrid car with a decent electric range can help keep the bills down. Also, keeping an eye on the car's P11D price (the taxable value of the car, including VAT and options) is important as the higher the value of the car, the more tax it will attract.
Tax On Company Provided Fuel
If you use company provided fuel for personal miles, then the HMRC will tax you on that benefit too. This is based on an HMRC-set ‘multiplier’ for your company car’s BiK percentage.
Changes to Company Car Tax
Company car tax rates are usually adjusted every April. Therefore, it's essential to keep up-to-date with these changes.
Conclusion
Company Car Tax can be a complex topic, but with the right information, you can make an informed decision. Remember to consider the CO2 emissions and the list price of the car thoroughly when choosing a company car, as these are the main factors when calculating the tax on it. With the right car and tax planning, you can reduce your tax bill and enjoy the benefits of a company car.
FAQs
Q: Do I have to pay tax on company car UK? A: Yes, in many cases you do, but the exact amount depends heavily on the CO2 emissions and the list price of the car in question.
Q: Should I get a company car? A: That’s a hard question to answer. But with the tools and know-how to calculate your tax liability, you can make an informed decision.
Q: Does BiK count as income towards my tax bracket? A: Yes, Benefits in Kind counts as income and does progress you towards higher income brackets.