1st June 2022
The past couple of years have brought exciting news for those looking into purchasing a company car; there hasn’t been a better time to purchase that electric car for your business. But how much tax do you as an employee need to pay after receiving this benefit, and why? Also, can you benefit from using a company car? We will explore these questions and answer them in this guide.
What is company car tax?
If you are driving a car provided by your employer and it is available for you to use outside work, it is viewed as a taxable benefit. HMRC attaches a monetary value to the private use of the vehicle and collects tax on it; this is what we know officially as Benefit in Kind (BIK) tax.
How does company car tax get calculated?
This will look complicated but bear with us.
Calculating the tax is based on the CO2 emissions of the specific car provided, which was the Government’s way of encouraging companies to purchase more environmentally-friendly vehicles. Based on their emission levels, vehicles are put into different tax brackets, the table for which can be found on the Government’s website here.
This sounds simple enough, but that’s not the end of it. There are other (just a few) factors that also affect the amount you pay:
- The list price (P11D value) of the car before non-taxable items (e.g. road tax) and after optional extras
- The tax rate you are in (20%, 40% or 45%) based on your annual income
- The type of fuel the car runs on
- CO2 emissions of the car
The easiest way to determine the tax you pay is by using HMRC’s own car tax calculator, which will ask for all of the above details plus any tax-reducing facts like your contribution to the initial cost of the vehicle and the percentage of use.
Here is a calculation example in three steps:
- Determine the car’s list price (P11D value) – let’s take a C-Class Saloon C 300 d AMG Line Night Edition Premium Plus with a list price of £45,785
- Multiply this value by the company car tax rate – based on its CO2 emissions figure of 157 g/km; our car falls in the 31% bracket, so list price x 31% = £14,485, which is the BIK value.
- Multiply the BIK value by your personal tax rate of either 20, 40 or 45% to get the amount payable. If you are a higher rate taxpayer, this will be £14,485 x 40% = £5,794
Electric vs Diesel vs Hybrid
Ok, so we are familiar with the calculation method, so let’s compare a similarly priced diesel car to a hybrid and an electric one (all with assumed 0% capital contribution or employee payment towards the car):
| Tesla Model 3 Long Range (electric) | Mercedes Benz C300d AMG Line (diesel mild hybrid) | Mercedes Benz C300e AMG Line (petrol plug-in hybrid) | |||||||
|---|---|---|---|---|---|---|---|---|---|
| Tax Year | 2022/23 | 2023/24 | 2024/25 | 2022/23 | 2023/24 | 2024/25 | 2022/23 | 2023/24 | 2024/25 |
| P11D value (list price) | £54,990 | £54,990 | £54,990 | £47,000 | £47,000 | £47,000 | £52,455 | £52,455 | £52,455 |
| Percentage charge | 2% | 2% | 2% | 31% | 31% | 31% | 8% | 8% | 8% |
| Benefit in kind value | £1,099 | £1,099 | £1,099 | £14,485 | £14,485 | £14,485 | £4,196 | £4,196 | £4,196 |
| Tax payable at 20% | £219 | £219 | £219 | £2,897 | £2,897 | £2,897 | £839 | £839 | £839 |
| Tax payable at 40% | £439 | £439 | £439 | £5,794 | £5,794 | £5,794 | £1,679 | £1,679 | £1,679 |
Petrol vs Diesel
The tax bill on diesel cars will typically be more expensive as they pollute more than their petrol counterparts. When you look at cars, keep this in mind and see if you cover enough miles to recover the additional cost in fuel savings over a petrol-engine car.
Electric cars
If you ever dreamed of having an electric car, it is still a good time to get one. The benefit-in-kind (BIK) tax rate has gone from 16% in 2019/20 to 0% in 2020/21 to 2% in 2022/23 and 2023/24.
What about hybrid cars?
Because of their lower CO2 emissions, hybrid cars make a great alternative or a stop-gap between buying fossil fuel-powered cars and fully electric ones. These vehicles will fall into a lower car tax band.
For example, a hybrid version of the above C Class Mercedes will fall into an 8% car tax rate versus 31% for the diesel-only version; however, it is more expensive to purchase.
So should you replace your fossil fuel burning car, then?
This is a decision for you and your company. You will be kinder to the environment and won’t have to worry about the running cost as they are a lot lower for electric vehicles. It’s a win-win.
Remember, however, that the owner of the car will be the company, so if you subsequently want to own the car yourself, you’d have to buy it from the company. We recommend talking to your accountant before making a decision.
If you have questions, please give us a call at 0800 917 9100 or send an e-mail to info@myaccountant.co.uk. For more useful guides, remember to follow us on LinkedIn, Facebook or Twitter.