Taxation of Company Cars

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A company car is a vehicle that is available for employees to use for business or even personal trips. Company vehicles may be cars, vans, or even motorcycles.

Background to Company Cars

Some companies provide cars as added benefits to their employees, or are offered as part of an employee’s salary package. Because these are included in an employee’s income from employment, company cars are considered benefits in kind which are taxed by HMRC. The income tax paid by the employee and the National Insurance Contribution filed by the employer are calculated based on the company car benefit in kind, or BiK, cash value.

Tax on Company Cars

The calculation of the BiK cash value is based on the following variables:

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  • manufacturer’s list price for the vehicle
  • fuel type
  • carbon dioxide emissions
  • other emission factors (i.e., if the vehicle uses diesel or if it meets RDE2 standards, or is a plug-in hybrid)

The total calculated BiK has a corresponding cash value for the individual vehicle. Every tax year, the cash value is declared in the P11D form of the employee. The maximum amount for the BiK value is 37% of the vehicle’s total price.

List Price of Vehicle x BiK Percentage = BIK Cash Value

Electric vehicles and those with ultra-low emissions have a reduced BiK percentage because the government encourages the use of these types of transportation services. For the tax year 2020/21, HMRC has already publicized new rates, which are considerably lower, for zero, low, and ultra-low emission vehicles.

Manufacturer’s List Price

The manufacturer’s list price includes such information as standard vehicle accessories, plate numbers, delivery, Value Added Tax (VAT), other optional add-ons such as high-spec wheels or metallic paint, and modifications (e.g., multimedia system installed) even after the delivery or those made in the middle of the tax year. If, however, the modifications were made or accessories added, after the delivery and are less than £100, then these need not be added to the list price. However, if the accessory was already included by the manufacturer before delivery, then the cost is added in the list price.

How the Tax Liability for a Company Vehicle is Calculated

The data below illustrates the calculation of the tax liabilities for both employers and employees using a diesel car and an electric car. The calculations are based on the manufacturer’s list price and BiK percentage published by HMRC for the tax year 2019/20.

Vehicle: Seat Leon ST (diesel)

  • Manufacturer’s List Price: £25,230
  • CO2 Emission (g/km): 112
  • BiK Percentage: 30% (26% plus 4% supplement for diesel fuel)
  • BiK Cash Value (Calculated): £7,569
  • Employer’s NIC (13.8%): £1,045
  • Employee’s Income Tax (20%): £1,514

Vehicle: Seat Leon ST (petrol)

  • Manufacturer’s List Price: £24,235
  • CO2 Emission (g/km): 112
  • BiK Percentage: 26%
  • BiK Cash Value (Calculated): £6,301
  • Employer’s NIC (13.8%): £870
  • Employee’s Income Tax (20%): £1,260

Vehicle: Nissan Leaf (electric)

  • Manufacturer’s List Price: £26,490
  • CO2 Emission (g/km): 0
  • BiK Percentage: 16%
  • BiK Cash Value (Calculated): £4,238
  • Employer’s NIC (13.8%): £585
  • Employee’s Income Tax (20%): £848

BiK Percentage Rates for the Tax Year 2020/21 (and subsequent two tax years)

HMRC publishes the rates of benefits in kind every year as well as any plan for the future tax years. By June 2017, HMRC has already published the rates for the current as well as the succeeding tax years.

Cars Registered before 6th April 2020

*The calculations in this table use the older NEDC emissions figures

Main Table of BiK Percentage (Benefit in Kind Rates)

Emissions (g/km) N/A 2020/21 2021/22 2022/23
Zero N/A 0% 1% 2%
1 – 50 > 130 miles 2% 2% 2%
1 – 50 70 – 129 miles 5% 5% 5%
1 – 50 40 – 69 miles 8% 8% 8%
1 – 50 30 – 39 miles 12% 12% 12%
1 – 50 <30 miles 14% 14% 14%
51 – 54 N/A 15% 15% 15%
55 – 59 N/A 16% 16% 16%
60 – 64 N/A 17% 17% 17%
65 – 69 N/A 18% 18% 18%
70 – 74 N/A 19% 19% 19%
75 – 79 N/A 20% 20% 20%
80 – 84 N/A 21% 21% 21%
85 – 89 N/A 22% 22% 22%
90 – 94 N/A 23% 23% 23%
95 – 99 N/A 24% 24% 24%
100 – 104 N/A 25% 25% 25%
105 -109 N/A 26% 26% 26%
110 – 114 N/A 27% 27% 27%
115 – 119 N/A 28% 28% 28%
120 – 124 N/A 29% 29% 29%
125 – 129 N/A 30% 30% 30%
130 – 134 N/A 31% 31% 31%
135 – 139 N/A 32% 32% 32%
140 – 144 N/A 33% 33% 33%
145 – 149 N/A 34% 34% 34%
150 – 154 N/A 35% 35% 35%
155 – 159 N/A 36% 36% 36%
160 – 164 N/A 37% 37% 37%

For diesel cars that are not RDE2 (Real Driving Emissions 2) standard certified, a maximum of 4%-37% must be added. For diesel cars that are RDE2 certified, 0% is added.

 

Cars registered after 6th April 2020

Cars registered after 6th April 2020 must use the updated, and higher, rates based on the WLTP emissions figures.

 

Main Table of BiK Percentage (Benefit in Kind Rates)

CO2 Emissions (g/km) N/A 2020/21 2021/22 2022/23
Zero N/A 0% 1% 2%
1 – 50 > 130 miles 0% 1% 2%
1 – 50 70 – 129 miles 3% 4% 5%
1 – 50 40 – 69 miles 6% 7% 8%
1 – 50 30 – 39 miles 10% 11% 12%
1 – 50 <30 miles 12% 13% 14%
51 – 54 N/A 13% 14% 15%
55 – 59 N/A 14% 15% 16%
60 – 64 N/A 15% 16% 17%
65 – 69 N/A 16% 17% 18%
70 – 74 N/A 17% 18% 19%
75 – 79 N/A 18% 19% 20%
80 – 84 N/A 19% 20% 21%
85 – 89 N/A 20% 21% 22%
90 – 94 N/A 21% 22% 23%
95 – 99 N/A 22% 23% 24%
100 – 104 N/A 23% 24% 25%
105 -109 N/A 24% 25% 26%
110 – 114 N/A 25% 26% 27%
115 – 119 N/A 26% 27% 28%
120 – 124 N/A 27% 28% 29%
125 – 129 N/A 28% 29% 30%
130 – 134 N/A 29% 30% 31%
135 – 139 N/A 30% 31% 32%
140 – 144 N/A 31% 32% 33%
145 – 149 N/A 32% 33% 34%
150 – 154 N/A 33% 34% 35%
155 – 159 N/A 34% 35% 36%
160 – 164 N/A 35% 36% 37%
165 – 169 N/A 36% 37% 37%
170 or more N/A 37% 37% 37%

*For diesel cars that are not RDE2 (Real Driving Emissions 2) standard certified, a maximum of 4%-37% must be added. For diesel cars that are RDE2 certified, except diesel plug-in hybrids classified as alternative-fuel vehicles, 0% is added.

Is it worth having a low or ultra-low emission company car?

Having a company car might not be a good decision in terms of tax efficiency if a company only has one director or shareholder or a few employees. This is because it might be more advantageous for the company to claim mileage for business trips. On the other hand, bigger companies with more employees, having a company car might be more practical because of the role of employees (e.g., sales). This is where it is recommended to choose vehicles that are classified as low or ultra-low emission because of tax concerns.

In terms of tax, there are perks to using low or ultra-low emission vehicles. Looking at data from the tax years 2017/18 and 2019/20, it can be seen that the BiK cash value of vehicles has increased.

Vehicle List price CO2 (g/km) BiK Cash value (2016/17) BiK Cash value (2019/20) % Increase in BiK Cash value
Seat Leon (diesel) £25,230 112 £6,055 £7,569* 25%
Seat Leon (petrol) £24,235 112 £5,089 £6,301 24%
Nissan Leaf (electric) £26,490 0 £2,384 £4,328 78%

*This includes a 4% supplement for diesel fuel

If the Company Pays for Fuel for Private Use

Tax on the cash equivalent value of the benefit is applied if a company director or employee uses a company car and, at the same time, receives free fuel. The cash equivalent amount is the same every year and was recently increased from £24,100 to £24,500 on 6th April 2020.

The BiK charge is calculated by multiplying the cash equivalent amount (i.e., £24,500) by a percentage which is the same as the rate for company car benefit purposes. For instance, if the BiK percentage for a company car is 13%, then the BiK charge on the fuel is obtained by multiplying 13% by £24,500, which is equal to £3,185.

Company Vans

Company vans that can also be used for private reasons are considered benefits in kind and must be reflected on an employee’s P11D form. The is the same if the company pays for the fuel every time the car is used privately. For the tax year 2021, the BiK on company vans is increased from £3,430 to £3,490. BiK on fuel for a van used for personal reasons is increased from £655 to £666.

Conclusion

Before offering a company car or vehicle to employees, it is important to, first, consider tax dues. HMRC is serious about increasing tax revenues. Do not hesitate to consult with an accountant to make sure your decision serves the company’s best interest.

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