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.
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.