There are some important changes to the way drivers of company-provided business cars are taxed this April.

Currently benefit-in-kind tax – often called company car tax - is payable on any car provided by an employer that’s used for business and private use.

The rate of company car tax is determined by a percentage of the car’s list price multiplied by the tax banding of its CO2 emissions.

At the moment this runs from 15% (140g/km) to 35% (240g/km and above).

For the 2008/09 tax year there will be an additional band. A new 10% tax banding has been created for cars with CO2 emissions of 120g/km and below. The cars that qualify will be known as qualifying low emission cars.

Most diesel-engined cars that qualify will still be subject to the additional 3% diesel supplement.

Nevertheless, both petrol and diesel cars that qualify will be a minimum of five bands lower than other company cars – with significant savings to be achieved.

At the same time, the current CO2 limits for the existing tax bands will be made tighter by 5g/km. So the 15% starting point will commence at 135g/km of CO2, instead of 140g/km.

How will this affect you?

Well, the driver of a Honda Civic Hybrid EX – which already qualified for a discount – drops a further two bands to make it £157 cheaper on tax each year. Example is for a 40% tax payer:

• Tax year 2007/08 12% or £938 tax per annum
• Tax year 2008/09 10% or £781 tax per annum

For the driver of a diesel MINI Cooper there are also significant savings: £283 each year. This example is for a 40% tax payer:

• Tax year 2007/08 18% or £1016 tax per annum
• Tax year 2008/09 13% or £733 tax per annum

And the good news is that manufacturers are responding with low-emission cars that qualify for the 10% tax band. These include the new Ford Focus 1.6 TDCi and the Audi A3 1.9 TDI e – both with CO2 outputs below 120g/km.

However, savings are not universal. Many cars will move up at least one tax band thanks to the tightening of the emissions criteria for the 15%-35% tax bands.

The result of this change will see an increase in tax payable by business car drivers. This highlights the importance of choosing low-emission vehicles.

Not only will employees pay less in company car tax, but employers will pay less in National Insurance contributions; and your company’s carbon footprint will reduce, too.

Further information

• Go to our Law & Tax section for further detail in our Company car taxation table
• If you need to know more about company car tax, read What is company car tax?
• For a road test of a qualifying low emission car read our test on the Audi A3 1.9 TDIe
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