Everything you need to know about company car tax

Before you finalise your fleet buying plans read this no-nonsense guide and plug the numbers into a company car tax calculator

As a small business, giving your employees company cars can be a more hassle-free and efficient way of keeping them moving than using privately-owned cars. It’s also a useful way of attracting new talent and then keeping them as you grow.

However, because you are effectively providing them with a benefit, if they use this car for any personal time (including commuting), there are a number of tax issues that you need to consider. Chief among them is benefit-in-kind company car tax.

Benefit-in-Kind Company Car Tax

This is a tax, paid by the employee at either 20, 40 or 50% in line with income tax, which reflects that the car they have been supplied with is partially for work and partially a benefit. For nearly 20 years, the foundation of this system has been based on the official CO2 emissions of the car, its P11D value, the type of fuel it uses and the tax band of the employee.

Here we look at those in isolation:

CO2 emissions

Every car on sale has an official CO2 figure attached to it, based upon a recently introduced test called the World Harmonised Light Vehicles Test Procedure (WLTP). This test produces a figure for every car, and includes variations depending on what options it has fitted.

The CO2 level of any car is determined by hundreds of factors such as powertrain, tyres, aerodynamics and weight, and options can have an effect. Bigger wheels create more rolling resistance, which increases how hard the engine has to work, which increases the CO2 emissions, for example. Or a sunroof adds weight, which also adds to the CO2 tally.

So when employees are looking at cars, make sure they are looking at exactly the one they are thinking of driving. Because if they’re looking at a base model, then pick a car with big wheels and lots of options which add weight, their tax band could jump a band or two, meaning they pay more than they thought they were going too.

The type of fuel affects CO2 emissions too: diesel is inherently lower in CO2 than petrol, while hybrids, even in the new WLTP regime, have generally low CO2 emissions because during the test they run on battery alone for part of it, where there are now CO2 emissions.

Fuel

For the last 15 years, choosing which car to go for has been relatively easy: diesel was always the best choice from a tax perspective, even though the government added a 3% surcharge to them to account for the other emissions they produce, which petrol cars do not.

The position has shifted in recent years though, as political and public pressure over these other emissions – nitrogen oxides and particulates – have taken effect as they are linked to air pollution. As a consequence, HMRC has realigned the emissions tables to take into account, and from April this year, put the surcharge up to 4%.

P11D

The P11D value of a car is the price including all the options chosen over the value of £100, VAT and any delivery charges, but it does not include the first registration fee or road tax.

This value is the one on which the cost of tax is calculated, relative to the fuel (if it’s diesel and there’s the 4% surcharge on top) and the CO2 figure.

Work out the taxable value

You can calculate taxable value using commercial payroll software, which will calculate each employee’s tax and add it to their pay slip at the relevant time.

Or you can use HMRC’s company car and car fuel benefit calculator:

How to calculate company car tax

  1. Multiply the company car tax band percentage rate by the car’s P11D value to give the benefit in kind figure.
  2. Next, multiply that figure by your marginal rate of tax (generally 20% or 40%) to give the yearly amount of company car tax due.
  3. If the CO2 emissions of a car fall between CO2 bandings, round the number down to work out the company car tax band that applies. For example, a diesel company car with CO2 emissions of 97g/km would fall into the 24% company car tax banding in the 2018/19 tax year.

If you want to present the tax table, FCA has one you could use here.

And for a helpful guide to Company Car Tax following the 2018 Budget Report take a look at this helpful summary.

To obtain a BIK figure for any FCA vehicle, click here:


How it works: an example

Fiat 500 0.9i TwinAir Pop Star 85HP Dualogic

P11D value £14,605

CO2 88g/km

CO2 Percentage charge 19%

Benefit in kind (14,605 divided by 100 multiplied by 19) £2,775

Annual tax payable at 20% £555/£46 per month

Annual tax payable at 40% £1,110/£93 per month


Don’t forget Class 1 A National Insurance Contributions

CLASS 1A National Insurance Contributions (NICs) are necessary to consider too: the current level of NI contribution is 13.8% in financial year 2018/19, and so for any vehicles brought onto the fleet, the CO2 figure is crucial not just to reducing the tax liability of the employee, but the employer too, because the P11D value and CO2 table used for calculating company cars is also used for NICs.

Other factors to take into consideration

There are some other factors you might need to consider when working out the company car benefit, including capital contributions (contributions made by an employee towards the cost of the car), time the car was unavailable in a year due to mechanical issues (if more than 30 days), or if the employee has made payment towards personal use. However, these are usually for specific instances and you can ask your accountant or finance team if this is relevant in your case.

Some background for your planning

The problem at the moment is that the levels of taxation currently have only been published up until the 2020/21 tax year, as the government has yet to decide how to take the system forwards. What that means is that drivers taking on a new car now, often on three or four-year leases, don’t know what they will be paying after this point.

But there are some assumptions you can make looking at the general direction of HMRC travel: diesel will probably become more heavily taxed, and petrol and hybrid/full electric will be less so.

HMRC data for 2016/17 shows that the annual average company car tax paid by drivers was £1,968 (£164 per month). That was 27% higher than the £1,552 (£129 per month) paid in 2015/16 and this is due to increasingly stringent tax bandings, despite it being at a time when CO2 on cars was falling.

With the new testing regime, CO2 figures are rising too, which means the tax bill for employees will also rise. However, there’s a very simple rule of thumb: picking the lowest CO2 cars you can find will result in the lowest possible tax bills.


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