IF YOUR business provides your employees or directors with a car for business and private use, it is taxed – provided the employee earns £8500 or more per year.
This tax is known as company car tax.
Private use includes commuting – and the car merely has to “be available to you” for it to count as private use.
Company car tax is also referred to as benefit in kind tax (BiK in shorthand). The taxman believes you are getting an additional benefit outside of work from work-supplied equipment, so he taxes you on it.
The amount of company car tax you pay is broadly determined by:
- The list price of the car and any accessories fitted to it.
- The car’s carbon dioxide (CO2) emissions.
- The type of fuel the car uses (diesel cars are subject to a 3% levy until the end of the 2015/16 tax year).
- The highest rate of income tax you pay (20% or 40%).
A general rule of thumb is the higher the CO2, or list price, or your income tax, the higher your company car tax bill will be.
So a low-emission cheaper car will be more tax-efficient than an expensive and less economical model.
In broad terms the CO2 emissions and list price (P11D) determine the benefit in kind charge. This amount is added to your earnings as a cash value and then taxed as part of your overall income. Depending on your level of income, some of this will be taxed at 20%, and some at the higher 40% rate.
So how does company car tax work then?
How to work out company car tax
- You need to know the CO2 emissions of your car. These are provided by the car manufacturers for your make and model. CO2 emissions are then banded into company car tax band tables that change each year and the emissions are given a percentage banding.
- This banding is then multiplied by the P11D value of your chosen car to arrive at a benefit in kind value.
- The benefit in kind value is then multiplied by your marginal rate of tax (20% or 40%). This is your final company car tax figure that will be deducted in tax from your salary.
- Let’s take as an example our current SME Company Car of the Year 2015, the BMW 520D SE auto. This has CO2 emissions of 109g/km which puts it into the 19% tax band (with the 3% diesel levy). With a P11D price of £33,860 this gives the BMW a benefit in kind value of £6433. Therefore the company car tax payable yearly would be £1,287 for a 20% tax payer; £2,573 for a 40% tax payer.
The P11D value of your company car can be raised by adding options, so it is worth checking how you might be affected by the addition of expensive extras to your car.
While diesel cars are subjected to a 3% levy until the end of the 2015/16 tax year, diesel-electric hybrids are not. Cars with the lowest company car tax banding are electric cars with zero emissions. For the 2015/16 tax year, their percentage rate on the company car tax table is just 5%.
The easiest way to find out the company car tax payable on your next car is to use our Company car tax calculator. This does the hard work for you. Our calculator will let you add options, too, so you can see the full picture of the benefit in kind you can expect to pay.