If there's a third certainty in life, it's surely that all matters relating to taxation will be horribly complicated. Company car tax is no exception, and when changes are made to the system on a seemingly annual basis, things can become confusing, to say the least.
Put simply, a car made available to you by your employer that you use for work but can also use personally outside of working hours, including commuting to and from work, is considered to be a benefit second only to the salary you are paid.
HMRC calls it a 'benefit in kind' (BIK), a term it applies to any perk or incentive other than your basic salary that's taxable. Most of us know this tax as company car tax.
How is company car tax calculated?
Many factors contribute to your company car tax bill, but the first is the vehicle’s value, commonly known as its P11D value, after the form your employer gives you detailing your various company benefits.
The P11D value is the car’s list price, including options fitted to it, plus VAT and delivery charges but not its first registration fee and road tax. Remember, it’s the vehicle’s list price, not its discounted price, that's considered. Also, there’s no point trying to save money by taking a used company car rather than a new one, because the same calculation applies.
The car’s P11D value is then multiplied by its BiK rate, which produces a ‘taxable value’ for the benefit, and the income tax bracket you fall into (20%, 40% or 45%, unless you live in Scotland where the rates are different). BIK rates are based on your company car’s official CO2 emissions, the type of fuel that powers it and, if it's a hybrid, its electric-only range.
CO2 is the primary factor here, because the government wants to incentivise us all to drive cleaner cars. The lower the car’s CO2 emissions, the less tax you pay.
Calculating BIK rates and tax charges
To find your car’s BIK rate, you must first know its CO2 emissions figure – perhaps by speaking with your fleet manager or car supplier. This will fall within one of the bands in the following table, giving you a BIK rate as a percentage.
BIK rates are usually adjusted every April, at the end of the financial year. However, they are currently frozen at 2022/23 levels until the end of the 2024/25 financial year. HMRC has yet to announce rates from April 2025 onwards, despite repeated calls from the fleet industry to do so.