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Company Car Tax Guide - Bands, BIK Rates, P11D Explained

A company car is a perk of any business that can be a reward, incentive and benefit for their employees. What's less attractive though is the tax burden of company cars which are affected by tax measures and other factors that can result in you paying higher taxes as an employee benefiting from the use of a company car. Changes to company tax bands in 2020 is likely to have an impact on a large proportion of company car drivers, with stricter tests now in place to test vehicles on their emissions.

Company Car Tax Explained

Company cars are deemed a benefit in kind (BIK) by HMRC and are therefore taxable if used privately and not just for business purposes. Company cars and other benefits are required to be reported to the taxman through a P11D form, which calculates the tax and national insurance payable on taxable benefits received by each employee in a single tax year. How much tax you pay on your company car is dependant on three main factors:

  • The P11D value of the car
  • The BIK percentage rate of the car
  • Your personal income tax rate (20%, 40%, 45%)

In other words, the tax you pay on your company car depends on the net invoice cost of your car, it's carbon dioxide emissions, and your annual salary. First let's break these down and understand how they each affect your tax bill. And then we'll look at how your tax is calculated and what you can do to lower the burden.

P11D Value - You may heard the phrase 'P11D value' of a vehicle and perhaps know that it has an effect on your taxable benefits. In reference to a company car, the P11D value is the list price of the car including VAT. This value includes any optional extras you've chosen to have factory fitted when you received the car, plus any delivery charges. The P11D value is used to calculate the tax on a company car, which is a representative value of the net price of the vehicle being driven.

Benefit it Kind (BIK) Rates - Every company car is classified by a band and percentage rate that is determined by its CO2 emissions. Greener cars receive a lower band and a lower taxable percentage and more polluting vehicles are placed in higher bands than will increase taxation. Each BIK band has a percentage rate applied to it, which is then used to calculate a percentage tax amount of the vehicle's value.

Personal Income Tax Rate - The income tax rate of the employee receiving the company car as a benefit is the third figure used in calculating company car tax. The basic rate in the UK is 20%, the higher income tax rate is 40%, and the additional rate for annual income over £150,000 is 45%. 

How Is Company Car Tax Calculated?

calculator-and-tax-invoice-on-a-desk

Company car tax is calculated as percentage of the car's value, using the P11D value, BIK rate and the tax bracket of the employee. The P11D value of the car is multiplied by the percentage value of it's BIK rate, which gives the car its 'benefit in kind amount'. This amount is then multiplied again by the 20%, 40% or 45% income tax bracket, which calculates a final taxable value that is paid on the company car.

As an example of how company car tax works, let's say you drive an £18,000 car and earn £35,000 a year. The CO2 emission of the car is 115 - 119 g/km a year, which has a BIK percentage rate of 26%. To calculate the benefit in kind amount, you'd multiply the £18,000 x 0.26 - which would be £46,800. To calculate overall company car tax would be £4,680 x 0.2. This would equate to £936.00 in annual tax for the company car.

You can calculate the amount of tax you’ll pay using the company car tax calculator on gov.uk. A company car is a benefit in kind and if it used for private reasons in any case then it can be taxed by HMRC. 'Private use' includes using the vehicle for commuting to and from a permanent place of work or if it is at all driven by a member of family or a household. If the vehicle is strictly driven for business use only, then it is not a benefit in kind and therefore not taxable as one.

Company Car Tax Band Updates for 2020 - 2023

At the start of the 2020/21 tax year, the UK government introduced a different structure for calculating tax for company cars with a new BIK rating system. The new system includes two separate sets of ratings for cars registered before and after 6th April 2020. It has been implemented to split cars that have had their emissions and fuel economy assessed under the previous NEDC testing system with cars that have been tested by the new WLTP test procedure.

One of the benefits seen by the new WLTP ((Worldwide Harmonised Light Vehicle Test Procedure) system is more accurate test readings for vehicle emissions and fuel economy. It is said to be more representative of ‘real world driving conditions’ with a longer driving cycle, more variations in speed, and testing at different temperatures compared to the NEDC model. 

The change is good news for EV and hybrid drivers, as vehicles that don't produce any emissions and have an electric mileage of more than 130 miles will pay no tax for the 2020/2021 financial year. The 0% tax rate will also apply to zero emission cars tested on the NEDC system and registered before April 6th. The rate for zero emission vehicles will rise to 1% in the 2021/22 financial year and then to 2% the year after.

BIK Rates Table - Changes to company car tax

Under this new system it has been estimated that around half of all new cars will see a 10 – 20% rise in their emissions as assessed by the WLTP, which is bad news for drivers whose vehicles will move up tax bands and so will be left paying more tax for the same car. To calculate company car tax, cars registered before April 6th have BIK rates based on the NEDC test. Cars registered after April 6th will have BIK rates based on WLTP assessments. A vehicles CO2 emission is recorded in (g/km) and has an appropriate percentage applied for 2020 - 2023. The appropriate percentage is the figure used in calculating your tax bill. Visit the below source (pages 14-16) and see the official government table for how to calculate company car tax for vehicles registered before and after April 6th 2020.

Source: HM Treasury: Review of WLTP and Vehicle Taxes

How To Pay Less Company Car Tax

Under the new tax rules for 2020, businesses are incentivised to make the shift to hybrids and electric vehicles. Plus, the new testing measures under WLTP should influence manufacturers also to create more fuel efficient and greener vehicles now that the standard for testing is more rigorous. Since the tax burden for a company car is commonly passed onto the employee, they too are incentivised to choose a vehicle that has less CO2 emissions.

As of 2018, diesel cars that are non-compliant with the RDE2 test for rising NOx emissions will receive a 4% supplement on their BIK rate over petrol cars. So what fuel your car uses is also now going to have an impact on how much benefit in kind tax you're paying.

Without having to use a company car tax loophole you can effectively reduce the tax you pay by simply choosing a hybrid or electric vehicle that has a 0 - 2% tax rate. If a EV or hybrid doesn't suit your lifestyle than you should focus on finding a low emission vehicle and bear in mind different tax rates for petrol/diesel versions. You can also reduce the P11D value of the car you drive by opting for a less expensive car and avoid adding factory-fitted extras that can increase this value.


At Stoneacre Leasing we have a wide range of vehicles available for business leasing which are perfect for your next company cars. From Alfa Romeo to Volvo, we have you covered. Use our interactive website calculator to compare vehicles and customise a lease deal for you and your business. Compare contract lengths and initial rental fees to match your budget and choose from vehicle maintenance packages for your bespoke lease deal.


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