Harry just received the ultimate double whammy at work - his boss has offered him a promotion and one of the additional perks is the luxury benefit of a company car that he’ll have access to in his own time.
The company have set Harry a budget and left him to his own devices to choose the car. When Harry arrived home, he celebrated with a beer and a curry, while searching for his new mode of transport.
He soon realised that there were varying tax implications on company cars that he was unaware of. Digging a little deeper, Harry learnt that all company cars are taxed by HM Treasury which is known as Benefit-in-Kind (Bik) tax.
Looking further into Bik tax rates, Harry found out there was a way he could calculate his potential company car tax and figure out how much he would actually be paying for the current year.
|CO2 Emissions (g/km)||Petrol, Electric, RDE2, Compliant Diesels tax band (%)||*Non-RDE2 Compliant Diesels Surcharge (%)|
*add 4% up to a maximum of 37% for diesel cars that are not certified to the Real Driving Emissions 2 (RDE2) standard. We’ll go through the current Bik company car tax bands in a little more detail, but it’s really handy to have this table as a point of reference.
What is benefit in kind (Bik) company car tax?
If you’re an employee that uses a company car for private use, it’s a legal requirement from HMRC that you pay a Bik contribution for the benefit you are receiving through the car.
As the company car has a monetary value attached to it for your private use, the car is legally regarded as a Benefit in Kind.
Every car available to buy in the UK has a Bik percentage band (middle column of table). Don’t worry, the percentage hasn’t just been plucked out of thin air, it’s calculated based on:
For the 2019/2020 tax year, CO2 emissions have been calculated using an official NEDC (New European Drive Cycle) percentage figure. The official figure for the car is measured in grams per kilometre which are converted into a percentage multiplier and then applied to the list price.
The government has designed Bik tax rates to benefit business drivers who drive low CO2 emitting cars like pure electric cars or plug-in hybrids. As you can see from the table, the lower CO2 emitting cars fall under a lower Bik tax band, meaning they’ll be taxed at a lower cost.
The P11D value of your car is a key component used to calculate the amount of company car tax you have to pay.
Although it may sound like a complex mathematical equation, your P11D value is named after a form (P11D Form) that your employers file to HMRC detailing your benefits and expenses.
The P11D value of a car includes:
- Vehicle’s list price
- Delivery Charges
- Optional Extras
- Value Added Tax (VAT)
It’s also in your best interest to know that the P11D value doesn’t include the vehicle’s first year registration fee or road tax.
After you have been registered on the government’s Pay As You Earn (PAYE) scheme, HM Treasury will then calculate the effective benefit you (the employee) receive from the company car based on the car’s P11D value. This is followed by applying a Bik tax rate on your vehicle.
How much company car tax will I pay?
The amount of company car tax you actually pay depends on four key factors:
- CO2 Emissions per km of your chosen car.
- P11D value of your car.
- Your personal Income Tax Band.
- Whether you have full access to the car and whether you make any personal contribution towards its cost.
We’ve already been over the first two factors so we’ll take a closer look at the latter two:
Personal Income Tax Band
The amount of Bik tax you end up paying is dependent on your annual salary.
The current income tax bands for England, Wales and Northern Ireland for 2019/2020 are as follows:
- Basic Rate - Up to £50,000 - 20%
- Higher Rate - £50,001 to £150,000 - 40%
- Additional Rate - Over £150,000 - 45%
For example, if you fall under the 20% basic rate bracket, you’ll pay 20% of the taxable portion of the car’s P11D value. Whereas, those in the 40% higher rate tax bracket will be taxed 40% P11D’s taxable portion. Most businesses will deduct the company car tax from your annual salary pack.
If you live in Scotland it works slightly differently. There are five marginal income tax bands instead of three:
- Starter Rate - 19%
- Basic Rate - 20%
- Intermediate Rate - 21%
- Higher Rate - 41%
- Additional Rate - 46%
In short, the higher tax bracket you fall under the more Bik tax rates you will be liable for. For more information on tax bands visit the HMRC website.
Access and Personal Contributions
If for whatever reason you don’t have access to your company car for a period of 30 consecutive days, the Bik tax that you owe will be reassessed to correspond with the amount of time you actually have use of the company car for.
If you make a one-off contribution to the payment of your company car, the amount you paid will be deducted from your final Bik tax liability. Working in a similar way, any payments you make to your employer for the personal use of the car will be deducted from the Bik tax charge.
How is it calculated?
To calculate the Bik tax on a company car requires the use of the following formulas:
P11D value x Bik CO2 percentage band = Bik value
Once you’ve got your Bik value we then have to calculate:
Bik value x Personal tax rate = Annual company car tax.
The following examples show the formulas in action using real-life car figures:
Volkswagen Polo 2.0L TSI GTI 200PS 6-speed DSG
- P11D value: £21,660
- CO2 Emissions: 138 g/km - 31% Bik CO2 tax band (Use table)
- Employee’s income tax rate: Basic 20%
£21,660 x 31% (0.31) = £6,714.40
£6,714.40 x 20% (0.20) = £1,342.92 Annual Company Car Tax
Or £111.91 per month (Annual Company Car Tax ÷ 12)
Audi A3 40 TDI quattro S Line 184PS 7-speed S Tronic
- P11D value: £34,805
- CO2 Emissions: 132g/km - 34% Bik CO2 tax band (includes 4% diesel supplement).
- Employee’s income tax rate: Higher 40%
£34,805 x 34% (0.34) = £11,833.70
£11.833.70 x 40% (0.4) = £4,733.48 Annual Company Car Tax
Or £394.46 per month (Annual Company Car Tax ÷ 12)
Fortunately, there are much easier ways to calculate how much tax you’ll have to pay for your company car. Company car tax calculators are readily available to save you doing the maths manually!
Non-RDE2 compliant diesels
As of April 2018, a 4% diesel surcharge was incorporated for diesel cars that are non-compliant to the Real Driving Emissions Step 2 (RDE2) test.
If a car fails to meet the required Euro 6 real-world emissions standards of Nitrogen Oxide (NOx), 4% is added to the cars relevant Bik tax band.
Any car emitting more than 80mg of NOx will face the additional 4% surcharge.
The RDE2 test was developed in response to Volkswagen’s ‘dieselgate’ emissions scandal. Volkswagen’s ‘official’ NOx and CO2 emission figures were incredibly inaccurate compared to real-road testing figures which sparked controversy through the automotive industry.
We hope we’ve managed to breakdown Benefit in Kind tax into a processable manner. We know it can be quite overwhelming at first, but using the current Bik tax table as a foundation is an absolute must!
Once you get a baseline understanding of company car tax, there are company car tax calculators to work out how much you actually have to pay as well as enabling you to plan future outgoings and forecast trends.
When choosing your company car, it’s crucial that you understand the benefit of lower emitting cars. Lower CO2 emission vehicles are taxed less, which in turn, makes them cheaper to buy. They’re also far more fuel-efficient and better for the planet, so there are no excuses really!
Knowing the tax savings on low emission vehicles is as important as ever. Come the 6th April 2020, the government’s refreshed BiK tax bands for the upcoming tax year will see zero emission vehicles pay absolutely nothing in regards to BiK tax. Compared to the current tax rate of 16%, there’s a hell of a lot of savings to be made in the coming years through electric company cars. If you want to know more about Company Electric Car Tax, check out our blog for a deeper insight.
If you want to look at an alternative to company cars, our Company Car Vs Company Car Allowance blog is a great guide that highlights the most significant pros and cons for both options.
If you want to take a look at some of the most efficient and government-friendly cars around, check out our Best Company Cars list.
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