How Does Company Car Tax Work?

Company Car Tax Made Simple

Regardless of whether the company car is financed or owned, you will probably have to pay company car tax.

While we do not claim to be tax experts, we do discuss this with our customers on a regular basis, so we’ve written an article explaining what company car tax is, and how it works.

Do I need to pay Company Car tax?

If you are employed by a company and you get given a vehicle which you can use for personal use (you take it home), then you will pay company car tax. The exception to this rule is if you are a Partner of a Partnership or a Member of a Limited Liability Partnership (LLP), or if you are are the proprietor of your own business. Directors of Limited companies still have to pay company car tax.

You do not need to pay company car tax if the car in question is only used for work. This means that it is left at your employer’s place of work every night and weekend and is used strictly for work reasons only. Your employer can advise the HMRC that this is a “pool” car and you won’t need to pay company car tax.

man in a company car

What is Business Mileage?

While we may drive to get to work, commuting doesn’t actually count as business mileage in the eyes of the HMRC.

Business mileage is using the vehicle to perform your job functions, such as making deliveries, client visits or taking clients out for example.

How Does Company Car Tax Work?

how to calculate company car tax

The amount of tax you’ll pay is dependent on the type of car, namely the CO₂ emissions and the P11d value. How much you pay per month is calculated by your income and what tax bracket you’re in.

If you don’t want to do the calculations yourself (understandable), then you can go to a website such as Comcar, who have their own company car tax calculator. Alternatively, if you’re using a broker or dealer then they should work out the company car tax for you.

Essentially, if you’re looking to save a few pennies the general rule for lower company car tax is;

Lower CO₂ emissions and the P11d value = lower company car tax

So how can you calculate the company car tax manually?

Petrol vs. Diesel  Discover which one is best for company car tax?

Calculating your company car tax

Here’s how you work out how much tax you’re liable to pay on your company car:

  1. Take your car’s ‘P11D Value’ – this is;
    • The maker’s list price
    • VAT
    • Delivery
    • Number plates and any other cost options
    • OR, you can take the On the Road price and minus £55 (registration fee) and the cost of the first year’s road tax if there was any.
  2. Then, multiply the P11D value by the vehicle’s company car tax rate – the outcome of this is called your Benefit-in-Kind amount
  3. Multiply your Benefit-in-Kind amount by your personal tax rate. This result is what you will pay annually in tax for your company car.
woman doing calculations

And that’s how you calculate your company car tax. Here’s an example of the calculation in action to make things less terrible;

Say a car has a P11D value with £10,000 and a company car tax rate of 15%. The BIK value will be £1500. If your personal tax rate is 20%, your company car tax on the vehicle will be £300 (20% of £1,500)

It should be noted that most workers receive a tax-free allowance of £11,000 (April 2016/2017 tax year), although this can be affected by personal financial circumstances. Since we first published this article it has been announced that the BIK rates are changing, and that there will be new bands for low emission and ultra-low emission vehicles. We have provided a table below so you can see the changes for the coming tax year (April 2017). 

New BIK rates

Is Paying Company Car Tax on a Business Lease Cheaper Than Going Personal?

A lot of the time, business leasing is cheaper than going personal. A majority of cars now have very low CO₂. In fact, at the time of writing, BMW have just launched a new 7 series with a CO₂ of 129g/km.

However, the answer gets more complicated when some manufacturers and/or finance houses quote different monthly rentals depending on if you are a business or a private customer.

Man smiling whilst he's on the phone

So, you can spend hours trying to work out what the best deal is, or you can speak to a credible broker who will do all the research and the maths for you. For free.

It’s also important to note that the type of car you’ve decided to lease can greatly affect this price comparison. For example;

Say you wanted to lease a Range Rover through the business. You could end up paying over £1000 a month in tax. With a car like that, you would be much better off doing it privately. However, as I said, I’m not an expert so I won’t give you advice on the specifics, it would be a good idea to talk to an accountant.

Who Pays for Company Car Tax?

So, who pays for the company car tax? You do, and so does your company. Once you’ve calculated your BIK figure, deduct that from your personal tax allowance. That figure is then what you will earn before you start getting taxed, either 20% or 40% depending on your tax bracket. The car tax will be deducted from your salary the same as ordinary tax.

Your employer will also be paying tax on the car because they are providing you with a benefit. It all gets quite confusing, so the best thing to do would be to either speak to your HR department or accountant. Alternatively, you can speak to an experienced vehicle broker who will be happy to advise you.

What Are the Most Expensive Cars for Company Car Tax?

The most expensive cars will be the ones with the highest CO₂ emissions and P11d`s

So, if you’re looking at the 4×4’s, performance cars and inefficient cars such as;

These will be pretty pricey.

What are the Best Cars for Low Company Car Tax?

The lower emission vehicles tend to be much cheaper for company car tax, as well as being a better value vehicle, to begin with, which generally brings the insurance cost down.

These are cars like;

  • Hybrids
  • Electric Cars
  • Cars with CO2 less than 129 or, for very low car tax anything less than 99

Essentially, it’s important that you do your research and check all the taxation rules before you make a decision about leasing or buying your car through a business. While it may seem like you’re better off, it’s best to seek some advice before you sign on the dotted line.

And, if all else fails, you can ask your broker for advice and your accountant for the numbers and let them do the research for you. Easy.

The Autumn Statement made some big changes to company car tax - Discover what  and how they will impact you here
Ben Murphy

Ben Murphy

Team Leader at OSV Ltd
Ben enjoys: Spending time with his daughter, football, socialising and the gym.

Ben is very laid back and calm when it comes to work, and he gets huge results with it. He's got one of the highest recommendation rates in the office and always knows the best deal for every situation.
Ben Murphy

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