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If you’re getting a company car or already have one, you may have heard about company car tax. Knowing what it is and how it can affect you is important. Here, we’ll take a look at precisely what company car tax is and how it works.
What Is Company Car Tax?
Company Car Tax is a type of tax imposed on employees for the benefit of using an employer-provided vehicle. This is also referred to as Benefit in Kind (BIK).
It is calculated by assessing either the list price of the car and its CO₂ emissions to determine the applicable BIK percentage. Cars with lower emissions attract lower tax rates than those with higher CO₂ emissions, encouraging drivers to choose more environmentally friendly vehicles.
The employer reports the benefit to HMRC, but the tax is paid by the employee through Income Tax, usually via PAYE. HMRC calculates the amount owed based on the vehicle’s BIK value and the employee’s Income Tax band (20%, 40% or 45%).
What Is a Company Car Tax Calculator?
A company car tax calculator allows employers and employees to estimate how much Company Car Tax is due.
The calculator considers information such as:
- Tax year
- Car availability
- List price (P11D value)
- Capital contributions
- Payments made towards private use
- Date first registered
- Fuel type
- Engine capacity
- Official CO₂ emissions figure
Once these details have been entered, the calculator estimates the amount of Company Car Tax payable.
HMRC’s Company Car Tax Calculator is generally the most reliable option, as it uses the latest official tax rates.
If a vehicle has been unavailable for more than 30 consecutive days, the calculation may instead be worked out manually using the P11D value.
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Tax-Free Benefits
Although you pay tax on the company car itself, many of the running costs covered by your employer are tax free.
These commonly include:
- Maintenance and servicing
- Repairs
- Insurance
- Road tax (Vehicle Excise Duty)
- Membership of a motoring organisation
For many employees, the value of these benefits outweighs the tax paid on the vehicle.
What Is Benefit in Kind (BIK) Tax?
Benefit in Kind (BIK) tax applies to benefits provided by an employer that are not part of an employee’s salary.
Examples include:
- Company cars
- Private medical insurance
- Childcare vouchers (where applicable)
If you have a company car, you’ll usually pay BIK tax. The amount depends mainly on the vehicle’s CO₂ emissions and P11D value.
Factors That Affect BIK Rates
CO₂ Emissions
The more CO₂ emissions a vehicle produces, the higher its BIK rate. This government policy encourages drivers and businesses to choose lower-emission vehicles, particularly electric vehicles.
Fuel Type
Fuel type also affects BIK rates. Petrol cars generally attract lower BIK rates than diesel vehicles, while fully electric cars benefit from the lowest rates available. Diesel vehicles often face higher tax charges because of their environmental impact.
Engine Size
Larger engine sizes generally result in higher fuel consumption, which can contribute to higher BIK rates.
List Price
The higher the vehicle’s list price (P11D value), the higher the taxable benefit. This means more expensive company cars usually result in higher Company Car Tax.
How to Calculate BIK Tax
To calculate your annual BIK tax:
- Take the vehicle’s P11D value.
- Multiply it by the vehicle’s BIK percentage.
- Multiply that figure by your Income Tax rate (usually 20%, 40% or 45%).
The result is your annual BIK tax.
To estimate your monthly cost, simply divide the annual amount by 12.
Company Car Tax on Electric Cars
Electric cars offer significant tax advantages. Because they produce zero tailpipe emissions, they attract some of the lowest BIK rates available. This makes them one of the most tax-efficient company car choices.
Alongside lower tax bills, electric vehicles can also reduce fuel costs and help improve environmental sustainability.
Fleet Evolution specialises in electric company car and salary sacrifice schemes, offering businesses and employees access to a wide range of electric vehicles.
For more information, contact our team to discuss the available options.
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What Is a P11D Value?
The P11D value is the vehicle’s official list price, including VAT and optional extras such as metallic paint. It is used by HMRC to calculate Company Car Tax and Benefit in Kind tax.
How Does Company Car Tax Show on My Payslip?
Company Car Tax usually doesn’t appear as a separate deduction. Instead, the taxable benefit is reflected through your tax code, meaning you pay additional Income Tax through PAYE each month. If you’re unsure how your company car affects your payslip, speak to your employer or payroll department.
Can I Lower My Company Car Tax?
Company Car Tax is determined by the vehicle you drive and your Income Tax band. If you’ve already chosen your company car, there are usually limited ways to reduce the amount you pay.
However, if you’re selecting a new vehicle, you can reduce your tax by:
- Choosing a vehicle with a lower list price.
- Choosing a car with lower CO₂ emissions.
- Selecting a fully electric vehicle.
- Contributing towards the vehicle’s purchase price (where permitted).
- Only having the vehicle available when genuinely needed, if agreed with your employer.
For an accurate estimate, use HMRC’s Company Car Tax calculator or speak with your employer.
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Fleet Evolution offers innovative salary sacrifice schemes, helping employers and employees save on costs while promoting eco-friendly electric cars. Enjoy easy setup, free maintenance, and swift activation for any company size.
FAQs
Company Car Tax is based on the vehicle's list price, CO₂ emissions and your Income Tax band. HMRC provides an online calculator that estimates how much tax you'll pay.
Approved Mileage Allowance Payments are tax-free payments made by employers to employees who use their own vehicle for business journeys, up to HMRC's approved rates.
Yes. Most company cars are subject to Benefit in Kind tax based on the vehicle's emissions, value and the employee's Income Tax rate.
Most company cars are taxable. The main exception is a qualifying pool car, which must meet strict HMRC rules, including being used only for business purposes and not being available for private use