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  1. 1. What is company car tax?

What is company car tax?

July 27, 2021
Employee benefits are a great way to reward hard work, boost morale and ensure loyalty, with examples of perks offered in the past including private healthcare, a gym membership and a company car.Before you hand over the keys, though, it’s worth considering the tax your employee might have to pay on the car. Some cars are taxed more than others, and if they’re too expensive to run, your employee could end up out of pocket.There are a few things to think about when deciding on whether a company car is right for your business, but we’ll start by explaining exactly what company car tax is and how it’s calculated.

What is company car tax?

If an employee drives a company car privately, HMRC classes it as a ‘perk’, so they’ll have to pay a separate tax on it – even if the only time they use it privately is to commute to work.How much tax they pay depends on what they earn annually, as well as the value of the company car and its carbon dioxide and nitrogen oxide emissions.In this instance tax most certainly can be taxing, but this article will go through everything you need to know about company car tax, what you'll get taxed on and how to be more tax-efficient.

How company car tax works

If any of your employees drive a company car, you’ll need to deduct company car tax from their wages. This is done through the Pay As You Earn (PAYE) scheme and recorded on a P11D form, which needs to be submitted to HMRC on 6th July every year, following the end of the tax year on 5th April. This is a fixed deadline so if you miss it, you can be fined up to £300 per form, with further penalties of up to £60 per day on top of that. You’ll also be charged penalties and interest if you’re late paying HMRC. You also have to pay Class 1A National Insurance on every company car, and if your employees use the cars for private use, you’ll have to file a P46 car tax form for each one too.A company car is a financial benefit that an employee gets on top of their salary, and as a result is classified as a Benefit In Kind (BIK) that they'll need to pay tax on.The factors that affect how much company car tax they pay are:
    The Income Tax bracket they’re inThe car’s P11D valueThe car’s CO2 and nitrogen oxide emissions

Income Tax bracket

Every working person in the UK has a personal allowance, meaning most people can earn up to £12,570 without paying any Income Tax. Earnings over that figure are taxed as follows:
Tax bracketTax payable
Basic rate20% tax on earnings between £12,571 and £50,270
Higher rate40% tax on earnings between £50,271 and £150,000
Additional rate45% tax on earnings over £150,001
There are some things that can affect this, however. For more information, check out our article ‘What are the tax brackets in the UK?’.

P11D Value

A way to measure the value of the car. Your car’s P11D value is its retail price (RRP), including VAT and any delivery charges, but excluding road tax and the first registration fee. Any optional extras fitted to the car while it’s still in the factory will be included in the list price and, therefore, its P11D value.

CO2 and Nitrogen Oxide (NOx) Emissions

If you choose a car with lower carbon dioxide (CO2) and Nitrogen Oxide (NOx) emissions, you won't have to pay as much company car tax as a car with much higher emission rates. This is because it will be given a better BIK rate. The BIK rate is determined by the car’s CO2 emissions and fuel type.Before April 2020, the government used New European Driving Cycle (NEDC) data to determine a car’s BIK rate. Now, new cars are tested using tougher criteria, meaning they generally have a higher CO2 reading (around 20% higher, although it varies from model to model). After April 2020, Worldwide Harmonised Light Vehicle Test Procedure (WLTP) tests started being phased in, as they’re designed to be more representative of a car’s performance in the real world.This means there are two sets of BIK rates being used: One for cars registered before 6th April 2020, and one for those registered after 6th April 2020. To make things fairer for cars registered after April 2020 – and therefore subject to stricter testing – the BIK rate is one percentage point less.The below tables give the different BIK rates, depending on when the cars were registered.Cars registered before 6th April 2020 (NEDC BIK rates)
CO2 emissions (g/km)Electric range (miles)2021-22 (%)2022-23 (%)2023-24 (%)2024-25 (%)
0N/A1222
1-50>1302222
1-5070-1295555
1-5040-698888
1-5030-3912121212
1-50<3014141414
51-5415151414
55-5916161616
60-6417171717
65-6918181818
70-7419191919
75-7920202020
80-8421212121
85-8922222222
90-9423232323
95-9924242424
100-10425252525
105-10926262626
110-11427272727
115-11928282828
120-12429292929
125-12930303030
130-13431313131
135-13932323232
140-14433333333
145-14934343434
150-15435353535
155-15936363636
160+37373737
Cars registered after 6th April 2020 (WLTP BIK rates)
CO2 emissions (g/km)Electric range (miles)2021-22 (%)2022-23 (%)2023-24 (%)2024-25 (%)
0N/A1222
1-50>1301222
1-5070-1294555
1-5040-697888
1-5030-3911121212
1-50<3013141414
51-5414151515
55-5915161616
60-6416171717
65-6917181818
70-7418191919
75-7919202020
80-8420212121
85-8921222222
90-9422232323
95-9923242424
100-10424252525
105-10925262626
110-11426272727
115-11927282828
120-12428292929
125-12929303030
130-13430313131
135-13931323232
140-14432333333
145-14933343434
150-15434353535
155-15935363636
160-16436373737
164-16937373737
170+37373737
From 2023/24, the two tables will be merged as this is when the new WLTP emission testing will be fully implemented.If your employee drives a diesel-only car, they’ll have to pay a 4% supplement (up to a maximum of 37%) if:
    The car was registered between 1st January 1998 and 31st August 2017The car was registered on or after 1st September 2017 but isn’t RDE2 compliant (meaning it emits more than 0.08g/km of NOx)
This 4% supplement doesn’t apply to diesel plug-in hybrids.

How company car tax is calculated

As an employer, you’ll need to let HMRC know how much company car tax your employees will be paying. You can do this by using the following calculation:Income Tax Band(%) x P11D value(£s) x BIK rate(%) = Annual company car tax payableFor example, your employee is a 20% taxpayer and they drive a petrol company car that was registered after 6th April 2020, with a P11D value of £20,000 and a BIK rate of 23% (due to CO2 emissions of 95g/km). So, based on the above calculation, you would multiply 0.20 (Income Tax Band) by 20,000 (P11D value) by 0.23 (BIK rate). This means the tax they would pay on the company car for the tax year 2021/22 is £920.You can also use HMRC’s company car tax calculator to work out how much company car tax is owed.

How to be more tax efficient

There are a few ways in which you can make tax-efficient choices when it comes to your company car.The most obvious is to opt for an electric or hybrid car as they produce less CO2 emissions, and as a result, have a lower BIK rate. Older diesel cars are also subject to an additional tax surcharge because of the NOx emissions they produce. Electric cars don’t produce any emissions at all, so they’re always taxed at the lowest rate. It used to be that drivers of expensive company cars were taxed more, but the government now taxes company cars based on emissions to encourage people to drive greener cars.Your employees will also pay less company car tax if they only use the car part-time or they pay something towards its cost.In some cases, they may not have to pay company car tax at all. Exemptions could apply in the following circumstances:
    The car is only used for business journeys (remember, this doesn’t include commuting to work)The car has been modified for an employee who has a disability, but only if its private use is limited to commuting to workA close relative works for you and you provided them with a car, but it wasn’t done through the business
An alternative to offering a company car is giving your employees a regular car allowance to help them with motoring costs. The downside for the employee, however, is that maintenance and repairs are unlikely to be covered by your business, so they’ll have to foot the bill themselves.

What other taxes apply to company cars?

If you pay for an employee’s fuel for personal use, they’ll have to pay tax on it as this is classed as a benefit too. How much tax they ultimately have to pay is based on a figure set by HMRC each year. For the 2021/22 tax year, this figure is £24,600. You then multiply £24,600 by your company car’s BIK rate and income tax band to get the amount that will be deducted from the employee’s salary over the current year.If an employee pays you back for the fuel they’ve used privately over the year, they won’t have to pay tax on it. Any electricity you supply to recharge an electric company car for private use isn’t taxed by HMRC either.You should always let the tax office know of any changes to your company car or fuel circumstances. These changes will be reflected in your employee’s tax code, which HMRC will adjust accordingly.
Cam Finney
Cam FinneyHead of CX

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