Company car tax: what you need to know

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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. European car sales drop sharply due to impact of WLTP tests 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. 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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. The more CO2 a car emits, the more of its value is taxed. For instance, if the car emits 120g/km of CO2 and runs on petrol, you will pay tax on 25% of its value. The lowest rate, for cars emitting 0g/km of CO2, is 13%, and the highest rate is 37%. Once you have worked out the tax band, apply the relevant percentage to the car’s P11D value to find its benefit-in-kind value. By way of example, a BMW 520d M Sport emits 117g/ km of CO2 and sits in the 28%tax band (including its 4% diesel surcharge caused by the Real Driving Emissions test, for which no car yet meets the standard). Its P11D value is £40,515, so tax will be 28% of that, meaning a benefit-in-kind value of £11,344. Once you have that figure, multiply it by your income tax rate. Using our example above, £11,344 multiplied by 40% (assuming higher-rate income tax) means an annual bill of £4538. Therefore, that particular car will cost £378 each month. In some cases, a company car driver’s bill will be reduced if the driver contributes to the monthly lease cost of the car, or if the car is only available to the driver part-time. Petrol vs diesel: The 4% surcharge on diesel cars is there to discourage us from choosing diesels and persuade us into supposedly cleaner petrols. That may seem punitive, but because diesel cars emit less CO2 than their petrol equivalents, even after the surcharge is applied, the difference in tax liability between the two may not be significant.] For drivers who cover higher than average mileage, meanwhile, the benefit of better diesel fuel economy will probably outweigh the 4% surcharge. Let’s look at three examples.

BMW 5 Series:

Let’s assume our company car driver is a higher-rate tax payer who drives 1500 miles per month. The petrol 520i emits 134g/km of CO2 and is in the 27% bracket. The 520d diesel emits 119g/km and sits in the 28% band. The petrol BMW will therefore cost £355 per month compared with £378 for the diesel. Each month, the petrol car will cost £177 to fuel compared with £145 for the diesel, so overall the diesel works out cheaper by £9 per month. However, if the driver covers only 1000 miles per month, the petrol is the cheaper choice by £2.

Mercedes-Benz S-Class:

Our driver is an additional-rate tax payer and covers 2000 miles per month. The petrol S-Class emits 169g/km of CO2 and falls in the 34% tax bracket, while the diesel S-Class emits 153g/km and slots into the 35% bracket. The petrol car will cost £1099 per month while the diesel will cost £1103. Each month, the petrol S-Class will therefore cost £1410 in tax and fuel compared with £1352 for the diesel one

BMW i8:

It may to be a few years old, but the BMW i8 is still one of the most eye-catching cars on the road. And although it doesn’t match a Porsche 911 for sheer driving thrills, the i8 is great to drive in its own way. With CO2 emissions of 42g/km, it slots into the lowest, 13% tax band. Its P11D is £112,680 and its benefit-in-kind value £14,648, so an additional-rate tax payer will pay £549 per month for it. The £100,781 Porsche 911 Carrera 4 GTS, meanwhile, would cost the same driver £1398 per month – an additional £10,000 each yea