Explained: Company Car Tax
Is a company car worth it?
Company cars are seen by many as a great benefit to have, with numerous employers offering a company car as one of their benefits in order to entice new employees.
Typically, a company car will be inclusive of insurance, car tax (VED) and servicing/maintenance.
However, while those with company car experience will know, it is important to acknowledge that company cars come with a cost, and it comes in the form of tax.
Therefore, it is prudent to consider both the pros and cons when it comes to accepting and using a company car - so let’s get into the details…
How does company car tax work?
Whether you use your company car fully for business purposes or just for commuting and personal use, the HMRC will see this as a perk, and so tax will be applicable.
How much tax you pay on a company car will depend on a few things - namely the following:
- P11D value of the car
- BIK (Benefit in Kind) rate
- Personal income tax rate
In other words, the tax you pay on your company car depends on the net invoice cost of your car, its carbon dioxide emissions, and your annual salary.
But let’s break down those three key areas…
How Company Car Tax is calculated
Now it’s time for a little bit of maths, bringing the three key areas together to work out how much company car tax would cost you.
Starting with the P11D, get hold of the total invoice price of the car in question - once you have this, find out which BIK rate is applicable for the vehicle.
There are a total of 18 BIK rate bands, starting with 0-50g/km of CO2 right up to 165g/km+. Each band comes with two separate rates - one for petrol or electric vehicles, and a second for diesel - with a 4% surcharge in place for the latter.
This rate represents how much of the car’s value is taxable - once you have this rate, you should have two figures: your P11D value, and your BIK rate.
Finally, you’ll need your personal income tax rate - this will be 20%, 40% or 45% depending on your annual income.
Once all three figures have been identified, it’s time to do some quick calculations:
P11D Value x BIK Rate = BIK Amount
BIK Amount x Income Tax Rate = Company Car Tax
Here’s a working example:
£25,000 [P11D] x 27% [BIK Rate] = £6,750
£6,750 x 20% = £1,350 Comany Car Tax for the financial year
Company Car Tax on Electric Cars
Company car tax for electric cars - zero emissions vehicles - currently has the lowest BIK rate of any vehicle type at just 2%, which will be the case through to the end of the 2024/25 financial year.
However, from 2025/26, the benefit in kind for electric cars will rise by 1% for three consecutive years - so by the 2027/28 financial year, the rate will have risen to 5%.
Drive a hybrid company car? Well, if it’s a type of hybrid that is charged by the engine, the vehicle will use the same rates as a regular petrol or diesel.
However, if your car is a PHEV (plug-in hybrid), then your BIK rate will depend on how far the vehicle can travel on electric power alone.
Company Car Tax FAQs
