Company car tax explained

A company car is a tax-efficient way of rewarding an existing employee, with 64% of company car drivers agreeing whether a company car is offered or not is considered an important factor when taking a new job. But, a company car doesn’t come for free, it is subject to tax, so what is company car tax and how do you work it out?

What are the tax benefits of leasing a car?

Setting up a vehicle lease contract allows you to take advantage of many car leasing tax benefits. With a business lease deal, your company can make significant VAT savings on the monthly payments, as well as several other tax benefits.

Car leasing tax benefits

• You can keep the vehicle costs off your balance sheet, allowing you to free up credit for other areas of the business.

• You can claim back 100% of the VAT on payments, as long as the vehicle is solely used for business purposes. This amount reduces to 50% if the car is also used for personal journeys.

• You will have the opportunity to offset up to 100% of the cost against your tax bill. The amount you can offset is dependent on the emissions of your chosen vehicle. However, if you choose to lease a van, you can offset 100% of the cost against your tax bill, regardless of the emissions.

• If you choose to add a maintenance or excess mileage package, you can claim 100% VAT back on the service charge and offset 100% of the cost against your tax bill.

Other things to consider before taking a business car lease:

• If the vehicle is offered to employees as a company car, you will be expected to pay a higher rate of national insurance.

• The employee(s) will have to pay Benefit in Kind tax (BiK).

Are car leasing payments tax-deductible?

Car leasing payments are tax-deductible and you can claim:

• Up to 50% of the tax paid on the monthly payments of your lease

• Up to 100% of the tax paid on a maintenance package

The cost of leasing a car can also be deducted from your taxable profits. The amount deductible will depend on the CO2 emissions of your chosen vehicle. In order to qualify for car leasing tax benefits, the vehicle must be considered a company car and used primarily for business purposes. Your company must also be VAT registered. The lease vehicle can also be used for personal journeys, but at least 50% of the driving must be business-related. 

Company Car tax

So, if your employer has given you a car, one that you can use for both work and personal use, then in the eyes of HMRC that vehicle is deemed a ‘company car’ and, as such, a ‘taxable perk’.

When it comes to company cars, the amount of benefit-in-kind tax you’ll have to pay will depend on the list price of the vehicle. But it will also depend on the car’s CO2 emissions (in grams per kilometre), the type of fuel it uses as well as your income tax rate or band.

What is BIK Tax?

As an employee or company director, you may receive certain benefits from your company such as accommodation, a loan or a company car, etc. While some of these benefits are tax-free, you’ll need to pay taxes for using certain things like housing or a vehicle provided by your employer (if you’ve chosen to have these). The amount of tax, otherwise known as benefit-in-kind or BIK tax, that you end up paying on these ‘company perks’ will depend on a few different factors, including the value of the benefit.

Reducing your Company Car Tax

By this point, you’re probably wondering if there are ways to reduce your BIK payments or company car tax. Only using the vehicle part-time or making contributions to the fees are a couple of ways of doing so. However, there’s also the option of choosing an electric (EV) or low-emission vehicle as your company car. And that last choice is significant, given the changes that HMRC has in store for the 2020 tax year, changes that could have a substantial effect on the amount of company car tax you’ll need to pay.

Company Car Tax Changes Taking Effect on the 6th of April 2020

From the 6th of April, the beginning of the 2020 tax year, how BIK tax is calculated will be modified. That modification is designed to favour vehicles with lower or net-zero CO2 emissions, thus rewarding drivers who are making more of an effort to ‘go green’. Simply put, this means that cars with lower CO2 emissions will be taxed at a much lower rate than higher emitting vehicles. For drivers of vehicles that land in the 1-50 g/km of CO2 bracket, that means a drop in tax rate from 16% to 2% and, in turn - a significant saving on their BIK payment!

These changes have been ‘in the works’ for a few years now. However, in July 2019 the Treasury decided to review previously published BIK rate tables for 2020/2021. Instead, they created two new tables: one for company cars registered before the 6th of April 2020 and the other for those registered after that date.

Why the last-minute alteration? Well, HMRC wanted to account for the difference in cars that were tested under the old NEDC (New European Driving Cycle) requirements from that of vehicles assessed by the new, more rigorous WLTP (Worldwide Harmonised Light Vehicle Test Procedure) criteria. From 2023/24, the two tables will be merged as rates align following the implementation of WLTP.

The decision was also made to introduce a zero per cent BIK rate for purely electric vehicles. That applies to cars registered both before the 6th of April 2020 and after. For EVs registered from 2020, their BIK rate will be 0% for one tax year, then will rise to 1% in 2021/22 and then to 2% in 2022/23.

Company car tax - how to find out what you need to pay

To figure out how much tax you’ll need to pay, you’ll first need to find out:

• P11d Value - the value of the vehicle including VAT, all the optional extras and delivery charge. This value does not include road tax charges or the registration fee. Your employer should have this value handy for you among their records. If you’re a company director, then your dealership can provide you with this value.

• Benefit-in-Kind % - vehicles are organised into groups based upon the level of emissions they produce to give a benefit in kind percentage. The emissions of any vehicle will be displayed on each relevant manufacturer website.

• Personal Tax Rate - the final factor to consider when calculating how much company car tax you will pay is how much you earn. Your payments will depend upon which income tax bracket you are in. If you are in the 20% bracket, you will pay 20% of the taxable portion of the car's P11D value, if you are in the 40% tax bracket you will pay 40% of the taxable portion of the car's P11D value.

Here's a table to help you figure out which BIK rate you are eligible for on cars registered from 6th April 2020.

Calculating your company car tax

Now that you know which car tax band your vehicle falls into, you can find out the taxable value of your car by multiplying the P11D value of your car by the CO2 tax rate from the table. Once you’ve got this figure, you then multiply it by your income tax rate (20%, 40% or 50%) to get the amount of BIK tax you need to pay. While you’re likely to find a company car tax calculator with a simple online search, it all comes down to this simple equation:

Please keep in mind that this calculation is of an incredibly simplified scenario.

Everyone's calculation will vary depending on things such as company car tax allowance, salary sacrifice, capital contributions, salary, fuel contributions and more.

Going forward with the new car tax

Now you know what company car tax changes are, and how you can find out and calculate what you’ll need to pay, you may find it worth switching to an EV or more low emission vehicle.