Company car tax: what you need to know

Another big change was made last year that concerns employees who are offered the choice between a company car and a car allowance, which is simply a sum of money paid on top of a basic salary. It usedto be the case that such employees were taxed according to the option they settled for. So if they chose the company car, they would pay tax based on its value, but if they chose the cash alternative, they’d pay tax on that sum. It was therefore possible to reduce your tax liability by choosing a company car whose value was much less than the car allowance that had been tabled.

Now, however, HRMC collects tax on whichever has the highest value. In effect, the change closes a loophole and removes one of the ways in which your tax bill could be lowered.

Put simply, it means more money in HM Treasury’s coffers.

Calculating your company car tax bill: 

First of all, it is worth knowing that the 29 company car tax bands – which are based on CO2 emissions – are adjusted annually, so your tax bill will rise slightly year on year. Your employer will deduct yourtax payments from your salary each month, just as it deducts your income tax and national insurance contributions. That means you don’t have to do anything yourself, but you must make sure your employer has calculated your tax liability correctly.

Your tax bill depends on the car’s CO2 emissions, its value and your salary. The CO2 emissions correlate to a tax band, expressed as a percentage. (All percentages here relate to the 2018-19 tax year.) Thevalue of the car includes its list price and all optional extras, and HMRC refers to this as its P11D value. Your rate of income tax – basic at 20%, higher at 40% or additional at 45% – is the third factor.

The more CO2 a car emits, the more of its value is taxed. For instance, if the car emits 120g/km of CO2 and runs on petrol, you will pay tax on 25% of its value. The lowest rate, for cars emitting 0g/km of CO2, is 13%, and the highest rate is 37%.

Once you have worked out the tax band, apply the relevant percentage to the car’s P11D value to find its benefit-in-kind value. By way of example, a BMW 520d M Sport emits 117g/ km of CO2 and sits in the 28% tax band (including its 4% diesel surcharge caused by the Real Driving Emissions test, for which no car yet meets the standard). Its P11D value is £40,515, so tax will be 28% of that, meaning a benefit-in-kind value of £11,344.

Once you have that figure, multiply it by your income tax rate. Using our example above, £11,344 multiplied by 40% (assuming higher-rate income tax) means an annual bill of £4538. Therefore, that particular car will cost £378 each month.

In some cases, a company car driver’s bill will be reduced if the driver contributes to the monthly lease cost of the car, or if the car is only available to the driver part-time.

At the start of the new financial year in April, the company car tax rates will be adjusted - inevitably they're going up. Rates for new petrol cars, and diesel cars complying with the new RDE 2 emissions standard (few will be certified as complying until 2020), will rise by £5 for models emitting between 90g/km and 150g/km CO2.

Rises are greater beyond that, with cars emitting over 255g/km paying £65 more. New, non-RDE 2 diesels (most of them) will pay £5 more in a range from 75g/km to 130g/km CO2 and a higher figure beyond that, peaking at £65 more for a diesel emitting over 255g/km.

Meanwhile, the fixed standard rate will increase from £140 to £145 for petrol and diesel cars. The five-year premium rate will rise by £10 to £320. Many older cars registered before 1 April 2017 will also incur a tax rise of between £5 and £15, although those emitting less than 120g/km CO2 will be spared. 

Petrol vs diesel: 

The 4% surcharge on diesel cars is there to discourage us from choosing diesels and persuade us into supposedly cleaner petrols. That may seem punitive, but because diesel cars emit less CO2 than their petrol equivalents, even after the surcharge is applied, the difference in tax liability between the two may not be significant.]

For drivers who cover higher than average mileage, meanwhile, the benefit of better diesel fuel economy will probably outweigh the 4% surcharge. Let’s look at three examples.

Ford Fiesta: 

This comparison looks at two mid-range Ford Fiestas with no optional extras. The petrol one emits 110g/km of CO2 and sits in the 23% tax band. The diesel emits 107g/km but, after the 4% surcharge, slots into the 26% band. Our driver is a basic-rate tax payer.

Each month, the petrol car will cost £70 in company car tax and the diesel will cost £85. Our driver covers only 500 miles each month. The petrol will return 60.1mpg, the diesel 67.3mpg. That means our driver’s monthly fuel cost in the petrol car is £49 and in the diesel £46. Therefore, the petrol model is cheaper overall by £12 per month. However, if our driver instead covers 2000 miles a month, the two cars will cost exactly the same amount in company car tax and fuel costs.

BMW 5 Series: 

Let’s assume our company car driver is a higher-rate tax payer who drives 1500 miles per month. The petrol 520i emits 134g/km of CO2 and is in the 27% bracket. The 520d diesel emits 119g/km and sits in the 28% band. The petrol BMW will therefore cost £355 per month compared with £378 for the diesel.

Each month, the petrol car will cost £177 to fuel compared with £145 for the diesel, so overall the diesel works out cheaper by £9 per month. However, if the driver covers only 1000 miles per month, the petrol is the cheaper choice by £2.

Mercedes-Benz S-Class: 

Our driver is an additional-rate tax payer and covers 2000 miles per month. The petrol S-Class emits 169g/km of CO2 and falls in the 34% tax bracket, while the diesel S-Class emits 153g/km and slots into the 35% bracket.

The petrol car will cost £1099 per month while the diesel will cost £1103.

Each month, the petrol S-Class will therefore cost £1410 in tax and fuel compared with £1352 for the diesel one

Zero- and low-emission cars: 

Having once been exempt from company car tax, zero-emission cars – full-electric and hydrogen fuel cell vehicles, in other words – now carry a 13% tax liability. That will rise to 16% in the new tax year. Meanwhile, cars that emit between 1g/km and 50g/km of CO2 also sit in the 13% category, while emissions of 51g/km to 75g/km place a car in the 16% tax band. The government considers any car that emits less than 75g/km to be an ultra-low-emission vehicle (ULEV). There are no pure-petrol or diesel cars that qualify – only EVs, fuel cells and plug-in hybrids. Again, let’s look at some examples.

BMW i3 33kWh: 

The BMW i3S is one of our favourite small electric cars, being both cleverly packaged and fun to drive. Its P11D value before options is £34,020 and its benefit-in-kind value is £4800, which means basic-rate tax payers will pay £80 per month, higher-rate payers £160 and additional-rate payers £180 per month.

In the new tax year, when EVs move into the 16% tax band, those figures rise to £98, £196 and £221. In the case of additional-rate tax payers, therefore, the annual cost of an i3S company car is set to rise by £492.

Toyota Prius 1.8 VVT-i Plug-In:

The plug-in hybrid version of the Toyota Prius has CO2 emissions of 28g/km and slots into the same 13% tax band as any zero-emission car. This means company car drivers can benefit from the same very low tax rate as a full-electric car, but with the range and flexibility of a conventional petrol or diesel car.

Meanwhile, the Toyota Prius hybrid (that is, not the plug-in model) emits 78g/km of CO2 and therefore sits in the 19% tax bracket. However, at £23,945, the hybrid model is £7640 cheaper than the plug-in. Even so, the plug-in model would cost a higher-rate tax payer £137 per month while the hybrid would cost £152.

Volvo XC60 T8 Twin Engine R-Design: 

With CO2 emissions as low as 52g/km, the plug-in hybrid Volvo XC60 demonstrates that bigger cars can slot into the ULEV category as well. It has a P11D value of £53,800 and falls into the 16% tax bracket, giving it a benefit-in-kind value of £8608.

Very few basic-rate tax payers would imagine they could afford a large SUV, but the XC60 T8 Twin Engine would cost them just £144 per month (so long as it was offered on their company car scheme, which is a long shot). A higher-rate tax payer, meanwhile, should expect to fork out £287 per month for this Volvo

Tax busters: 

Choose your company car wisely and you could find yourself driving one of the fastest or most luxurious cars on sale while paying very little company car tax. The trick is to look out for plug-in hybrids that slot into the sub-75g/km ultra-low-emission vehicle category. If your employer offers such a model, then you’re on to a winner – although WLTP disruption has meant some hybrids are temporarily not on sale.

BMW 530 iPerformance M Sport: 

It isn’t only drivers of six-figure-price luxury cars that can benefit from driving a plug-in hybrid. At £45,810, the BMW 530 iPerformance plug-in costs one-third of the price of the Porsche Panamera highlighted below but it, too, is a swift and luxurious executive car.

Slotting into the 13% tax band, it will cost a higher-rate tax payer £212 per month. That compares very favourably with the petrol-only 530i, which has almost identical performance figures but, at £419 per month, would be almost twice as expensive.

Porsche Panamera Turbo S E-Hybrid: 

One of the fastest-accelerating cars on the road has a 31-mile electric-only range and its CO2 emissions of 66g/km place it in the 16% tax bracket. With a P11D value of £137,140 and a benefit-in- kind value of £21,942, it’ll cost an additional-rate tax payer £823 per month. But there’s a temporary caveat: because of WLTP, it is currently not available to order.

By comparison, the petrol-only BMW M5 that offers similar luxury and performance would cost £1220 each month, which is close to £5000 more than the plug-in Porsche each year.

BMW i8: 

It may to be a few years old, but the BMW i8 is still one of the most eye-catching cars on the road. And although it doesn’t match a Porsche 911 for sheer driving thrills, the i8 is great to drive in its own way. With CO2 emissions of 42g/km, it slots into the lowest, 13% tax band. Its P11D is £112,680 and its benefit-in-kind value £14,648, so an additional-rate tax payer will pay £549 per month for it.

The £100,781 Porsche 911 Carrera 4 GTS, meanwhile, would cost the same driver £1398 per month – an additional £10,000 each year.