If there is a third certainty in life, it is 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 and the tax bands themselves are fiddled with just as often, the complexity of it all spirals out of control.
However, the reason why Her Majesty’s Revenue and Customs (HMRC) charges tax on the car your employer makes available to you is at least easy enough to understand. A company car is a benefit second only to the salary you are paid and HMRC therefore sees it as a taxable one. It calls it a ‘benefit in kind’, a term applied to any taxable perk or incentive other than your basic salary.
So if you run a company car, you will have to pay a certain amount of tax. A company car is defined as one that is made available to you by your employer and that you are allowed to use personally outside of working hours, as well as for work. HMRC considers your commute to and from work to be personal use.
European car sales drop sharply due to impact of WLTP tests
Calculating the amount of tax you’ll be liable to pay appears daunting at first, but it is actually reasonably straightforward. We’ll take a closer look at that later on. But put simply, the calculation is based upon the value of the car, your salary, the car’s CO2 emissions and the type of fuel it runs on. CO2 is the primary factor here because the government wants to incentivise us all to drive cleaner cars. Therefore, the lower the car’s CO2 emissions, the less tax you pay, all other things being equal.
In recent years, there have been significant changes to the way company car tax is structured. Diesel cars are subject to a 4% surcharge because they emit more nitrogen oxide, which is harmful on a local level. This was increased from 3% in April this year as part of the government’s efforts to discourage us from driving diesels. Meanwhile, electric and hydrogen fuel cell cars are no longer exempt from company car tax, although they do sit in a much lower tax band.
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.
Join the debate
Add your comment
Urgent review required
The Government needs to review the current company car scheme which has become chaotic and over punitive. The change to WLTP which was supposed to benefit consumers has further hit company car drivers with increased Co2 ratings leading to higher tax bandings. PHev’s remain too expensive for most drivers to choose and the real World MPG is often poor. For many drivers a company car remains the only financially viable option. However, the Government needs to take care not to cook the Golden Goose, as the levels of taxation now being charged will inevitably mean more and more people move away and choose to personally fund their vehicle, removing tax revenue and also leading to an increase in Co2 emissions as they are no longer incentivised to choose a car based on its Co2 ratings. Short sighted politicians and civil servants need to take heed!
Harry P wrote:
99% agree, except they already took measures to make sure the Goose kept laying, if you need to be mobile your company has to give you a car or an cash allowance or your not going to take the job if you have to fund your business travel yourself.
So they have added a system where even if you just get an allowance and buy/run your own car they will tax it as if it was a company car on BIK, if that gets HMRC more of your money than the basic rate tax on the allowance would have.So that 'loophole' is gone, if you take the cash and buy a high CO2 car you will get hammered same as a company car.The only option currently is to take the cash and get a hybrid or EV (any ULEV category) as they are exempt from the extra clause, currently! You will still pay your current tax rate on the cash allowance though.So hybrids are far from dead yet, you can see why EV's like the Kona which are viable alternatives to an ICE car are flying off the shelf, I suspect Kia will be shifting a fair few Niro's too. Plenty of room in the market for sensibly priced hybrids, not enough manufacturers making them though. JLR are you listening?
BIK tax has got out of hand.
BIK tax has got out of hand.
Our company car list is pretty mundane, Focuses, low spec Golfs, the odd crossover etc. Only hybrids are Yaris' and Auris', others too expensive for the company. No BEV's, again too expensive to lease. BIK tax for us, who are generally around/just above the 40% tax threshold, is therefore £180 per month plus. As a result we are mostly now returning our cars as the leases end and funding our own cars from the 45p per mile fuel allowance and saved BIK tax.
If this is a trend nationwide the HMRC will have to change it all again as theyll be losing out.
Bob Cat Brian wrote:
Not forgetting also the WLTP fiasco where cars were retested under new scheme and nearly all ended up with higher CO2 ratings, average at least 10% up but some as much as 20% so overnight they moved up the bands and the tax revenue shot up. The government SHOULD have adjusted the table downward in September to keep parity. Did they hell !!!! just stuck their fingers in their ears and quite hapilly pocketing 100's millions more tax.
@captainaverage
Totally agree. I hadn't realised just how much company car tax had gone up. 10 years ago I was paying less than £50 month in tax on a well specced Focus. I think the Government have gone too far with this. Whilst some don't really need a car for their job and it is a perk, for others it is essential for the job and perfectly reasonable for employers to provide a suitable vehicle. I'm also puzzled by how the car allowance is taxed. How is it a loophole if someone choses a cheaper car so they pay less tax? That's simply an individual's choice.
Will86 wrote:
The 'loophole' was a contradiction in that as they ramped up the BIK table, people were switching over to taking the car allowance instead. Free of CO2 related tax people were going for high emission vehicles again as it made no difference tax wise (noticed a lot of Mustangs on the road now?). This is why cashtakers who opt for ULEV's were given a loophole to get out the new rules as supposedly that is what the government want, to get more people into cleaner cars.There is only one way out of this at the moment, companies say we will not provide you with a vehicle at all, its up to you to use your own when required for business and we will pay you the tax free Mileage Allowance Payments (MAPs 45p/25p).
Instead of paying the employee a car allowance they would just increase salary for jobs with substantial travel. That combined with the quite generous MAP rates should cover them running a suitable own vehicle.
Sound like a good plan? then part 2 of the 'trap' kicks in, health and safety. Any employee travelling for their work, even in their own vehicle remains the responsibility of their employer, who should take all reasonable measures to ensure they are legally driving a suitable and well maintained vehicle. Prosecution and jail terms for senior management if the employer is injured due to a failing in one of these areas can and has happened. Its enough to scare the shit out of them so most companies handed it over to lease companies to manage in good faith they would ensure the vehicles were maintained.
Directors point of view, so what if the underlings pay through the nose in tax and lease costs? at least I won't go to jail when a wheel falls off. Who can blame them.