Company car tax

How does company car tax work?

Let’s say, you have to choose between two jobs. One that offers great benefits and the other that offers the same great benefits plus a company car. It’s an easy choice, right? You’ll go for the job with the car.   

But, a company car may not be the ideal perk you first thought it was - there's a lot more to consider than just the paint job. Company vehicles can have some tax implications and depending on the type of car you choose these can be less attractive.   

It can be confusing to understand and calculate but this comprehensive guide can help you understand the amount of tax you should be paying, to help you decide which is the most affordable company car to choose.

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When is a vehicle a company car?

A company car is a vehicle that was given to you by your employer as a company benefit - on top of your annual salary.   

It should be a vehicle that you are free to use in your personal time, as well as within working hours if required. Even if the only personal use of the vehicle is commuting, HMRC concludes this to be a perk and results in you paying tax. 

 

How much tax will I pay on my company car?

The amount of tax you’ll pay on your company car will depend on variable factors.   

These factors include how much you earn annually, the CO2 emission bracket of the vehicle and the P11D value of the vehicle  

If the vehicle runs on diesel, you’ll incur a 4% surcharge as of 2018 but if your car requires petrol fuel or runs on electric, the extra charge is waived.   

Your vehicle will fall into a CO2 emission band which has been carefully designed to align with the Worldwide Harmonised Light Vehicle Test Procedure. The WLTP came into force in 2017 and overtook the theory based, New European Driving Cycle or the NEDC.   

It uses driving data to assess on-road performance and calculates the fuel efficiency to see how much CO2 is emitted. 

As of 2019, all car dealerships will have WLTP-COZ values and all taxable incentives will follow suit.   

Here are the company car tax bands for 2019/2020: 

CO2 (g/km) 2019/20 BIK rate% (Petrol) 2019/20 BIK rate% (Diesel)

0-50

16 20

51-75

19 23

76-94

22 26

95-99

23 27

100-104

24 28

105-109

25 29

110-114

26 30

115-119

27 31

120-124

28 32

125-129

29 33

130-134

30 34

135-139

31 35

140-144

32 36

145-149

33 37

150-154

34 38

155-159

35 39

160-164

36 40

165+

37 41

 

* Cars that meet the standard Real Driving Emissions Step 2 (RDE2) are exempt from 4% diesel surcharge.

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How to calculate company car tax

To work out how much company car tax you’ll need to pay, HMRC will first consider how much CO2 your car emits. This will fall into one of 18 emission bands above.   

The lowest band starts with vehicles that emit 0-50g/km. The amount you’ll pay will appear as a percentage and you’ll notice that the diesel percentages are slightly higher than petrol as there’s an added 4% surcharge for diesel motors.   

This percentage will be multiplied by the recommended retail price, RRP of the vehicle, which is often referred to as the P11D amount or value which is calculated using a make-up of certain costs associated with the vehicle. You can see how to calculate your P11D value here.  

HMRC also offers a comprehensive calculator that you can use to help you work out how much tax you need to pay.

Company car tax calculator

The amount of company car tax you’ll pay can be calculated with a simple sum. The P11D value multiplied with the CO2 emission bracket is called the Benefit-in-kind value, often abbreviated to BIK.   

The BIK value is then multiplied again by the income tax bracket you fall into (20%, 40% or 45%). If you pay only 20% income tax, you’ll only pay 20% of the vehicle’s P11D value.

 

For example:
P11D value (RRP of the car): £20,000
CO2 emissions of the car: 95g/km
Fuel type: Petrol
Personal tax percentage: 20%
Using the above information you can calculate that the CO2 emission rate of 95g/km using petrol fuel is 20%. Next, multiply the P11D value of the vehicle by the CO2 bracket to get the BIK amount:
£20,000 x 20% = £4,000.
Finally, multiply the BIK amount by your personal tax percentage to receive the final company car tax you'll need to pay:
£4,000 x 20% = £800 tax payable for the financial year.

 

How can I lower my company car tax?

You’ll need to be as accurate as you can when you’re filling out your tax but there are things you can do that can help lower how much company car tax you’ll pay.   

If you can choose your vehicle, choose a model with a cheaper RRP or one that is in a lower CO2 emissions bracket.   

If you only have access to the vehicle within certain hours, or part-time, you’ll see a decrease in your tax amount. Also, if you contribute to the initial RRP cost of the vehicle it will bring down your overall fee.