Company Car Tax explained: What is means for you and how much it will cost

Kara Gammell
06/24/2019, 09:22 AM

Getting the go ahead from your boss for a company car is exciting. However, the potential tax implications are rather less so, as choosing the wrong vehicle can prove very costly.

A company car is likely to be renewed every few years and you will not be expected to pay for insurance, maintenance or repairs. 

 

Thanks to Her Majesty’s Revenues and Customs (HMRC), any private usage of a company car – even commuting – is viewed as a perk called a Benefit-in-Kind (BiK) and you will be charged tax on it. 

The good news? While your salary might be set in stone, you can choose your company car to reduce your tax liability.

How company car tax is calculated

How much company car tax you’ll pay depends on your salary, how much the car costs and the company car tax band it is in, based on the volume of carbon dioxide (CO2) emissions. Put simply, the lower your income tax rate, the lower the car’s purchase price, and the lower its emissions, the less it will cost you.

How do I calculate company car tax?

To figure out what you will have to pay in tax, calculate the car’s P11D value (the sum of its list price, cost of delivery, VAT and any optional extras – minus road tax or first-year registration fees) and multiply it by its BiK tax band percentage, which is determined by its CO2 emissions. 

Getting a bit much? Yes, it gets complicated quickly, but don’t worry – there are a number of handy online company car tax calculators that will do the sums for you. As you would expect, HMRC has a tool to help you. 

And if you want to know more detail, you can find it at the bottom of this article. 

Still keeping up? Good, read on…

Should I opt for the car allowance instead?

You may be given the option of a car allowance instead of a company car. This means that each month, you are given a set amount towards your personal motoring costs. 

Unfortunately, what is best for your finances is not always clear cut and will largely depend on your circumstances.

While on one hand, a company car is likely to be renewed every few years and you will not be expected to pay for insurance, maintenance or repairs. 

On the other, if you choose a car allowance, you have more flexibility on the make and model that you buy, whether you opt for a new or a used vehicle and you could have the option of owning the car outright.

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Calculating the Benefit in Kind tax for a car

First, find out what band it is in here

How much you will actually pay is this figure multiplied by your income tax band of 20%, 40% or 45% for residents of England and Wales. Or multiplied by 19%, 20%, 21%, 41% or 46% for residents of Scotland.

To further complicate matters, BiK bands are adjusted every financial year. 

What’s more, the type fuel your car burns also affects the amount of company car tax you must pay.  

Diesel cars, for instance, all face a BiK rate 4% higher than a petrol engine. Though, a high-mileage driver will usually recover the difference in terms of better fuel economy but for a low-mileage driver, the petrol car may be the cheaper option. 

(Told you it was complicated).

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About the author

Kara Gammell
Financial journalist
Kara Gammell is an award-winning financial journalist. She has written regularly for a number of national newspapers and magazines, including The Daily Telegraph, The Sunday Telegraph, The Guardian and The Observer.

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