Benefit in Kind: company car tax explained

Benefit in Kind: company car tax explained

04 November 2021 | Kate Kozlowska | 14 min read

There are increasing numbers of company cars on UK roads, but are they really as beneficial as they seem? With this quick guide, you'll learn how company car tax works and determine how valuable the scheme is.

What is a company car?

The term 'company car' refers to a vehicle assigned to an employee by a company for both business and personal purposes. 

Historically, company cars were bought in bulk with the keys being handed out to the employees. These days, employees usually choose their company cars from their employer's pre-approved list. 

The company car scheme: how does it work?

Usually, employees qualify for a company car scheme if they hold a significant and permanent position within the organisation and have a regular schedule of work. Frequently travelling in their role (e.g regional sales managers) is also a requirement for getting a company car. In addition, their wages must not decrease below the national minimum wage after joining the scheme.

What is the Benefit in Kind (BiK) tax?

Benefit-in-Kind means anything you receive from your employer other than a salary - in other words - a product or service that your employer pays for, on top of your wages. A company car is the best example of the Benefit in Kind.

Even though the Benefit-in-Kind isn't a salary, it has a monetary value, so it must be treated as taxable income. 

The employees' Benefit in Kind tax rate depends on their income tax band, the vehicle's price, age, fuel type, CO2 emissions, and engine size.

  • The employer uses the P11D form to record and declare Benefit in Kind.

What is a P11D?

There's both a form and a value, and neither is the same. A P11D form summarizing the value of all your BIK is provided by your employer by 6 July following the end of the tax year. Based on this report, HMRC determines what is taxable.

The P11D value of a company car has to be determined. It is calculated as follows:

  • The car’s list price with any extras and VAT
  • Delivery charges minus the registration

The annual car tax due for business vehicles is calculated based on it as part of the company car tax calculation. Remember, the higher your P11D value, the more tax you will pay.

The company car benefit calculation

A handy company car benefit calculator below can help you find out the value of the company car benefit. You will need:

  • The tax year
  • Vehicle’s approved CO2 emissions (WLTP)
  • Whether there’s a cash alternative
  • P11D value
  • List price (including VAT and accessories)
  • Employee capital contributions - what you pay towards the cost of the car/accessories
  • Fuel type
  • The date of registration

It is required that the level of CO2 emitted from the exhaust of a car be approved; this information appears on the type approval certificate. If your vehicle was registered after 1 March 2001, you can find this information on the vehicle registration certificate (V5C) or on the Vehicle Certification Agency website.

CO2 emissions at the date of first registration are fixed for the life of the vehicle.

Company Car and Car Fuel Benefit Calculator

When you receive a company car, the taxable value of the vehicle is added to your salary and the final amount is then taxed. 

If you earn less than £12,570, you don't pay tax. However, once you start earning more, you'll be taxed at 20 percent. Over £50,271, your tax rate will be 40%. In other words, depending on your income, the list price of the car could push you over the next tax threshold so bear that in mind when choosing your company car. 

You pay tax based on the following factors:

  • The vehicle's CO2 emissions
  • List price (plus accessories, less capital contribution)
  • What type of fuel it takes

An appropriate percentage is used for calculating CO2 emissions. The official CO2 figure for the car (measured in grams per kilometre) is converted to a percentage multiplier, then applied to the list price. This calculates the taxable benefit charge for the year.

Company car tax Benefit in Kind (BiK) rates

The company car tax calculation will require you to know the company car tax band. Click below to find the government car tax rates.

Car Tax Rates

Electric cars with zero tailpipe emissions have the lowest BiK rates at 1%, which will increase to 2% in 2022/23 but no further increases are due until 2025/26.

BiK rates for diesel and petrol cars range between 15% and 37%. This is the reason why electric cars are becoming the most popular company cars. 

BiK Company Car Tax Bands

Company car tax calculator

Follow the steps to calculate the company car benefit in accordance with the government's method, which is modified for classic cars and disabled drivers.

Calculation of the Company Car Benefit

However, if you want a rough idea of how much you might pay in company car tax:

  • Find your company car's P11D value
  • Multiply the P11D by your car's BIK rate
  • Multiply the result by your income tax percentage

As an example:

Let's say that you have a company car that has a P11D value of £25,000.

Its emissions are about the European average of 127 g/km and according to WLTP, this car has a BIK rate of 29%. 

For that car, the taxable amount would be £25,000 x 27% = £6,750.

How to reduce a company car tax?

You can reduce your company car tax by getting a car with a lower P11D value, for example.

Another option is to buy or lease a car with low CO2 emissions. This may also have the benefit of being more cost-effective due to any applicable VED exemption, and also being environmentally friendly.        

Buying a fully electric vehicle might not be feasible for everyone, but hybrid electric vehicles can also provide tax savings.

We recommend taking advantage of some of the best electric and hybrid models including an MG Motor MG5, Volkswagen ID3, Mazda MX-30, Tesla or Vauxhall Mokka-X.

Electric cars are relatively expensive initially, which is one concern. However, there are ways to make EVs more affordable and electric car leasing is one of the most common ones.

What is the tax on the company van?

The tax on company vans is fixed, unlike the tax on company cars. 

The BIK rate for company vans in 2021/2022 is set at £3,500. Your tax bracket determines the amount you will pay. If you pay 20% income tax, your van tax payment is £3,500 x 20% = £700.

You usually do not need to pay company van tax if you do not use the van for personal use, or if you are a sole trader.

Using a personal car for business

You may be able to claim fuel usage for your own car if you use it for work purposes beyond driving to and from work. You can claim back money according to the number of miles you drive and the type of vehicle.

You still have to pay for insurance, maintenance, and regular servicing since it's still your car. If you use your personal car for business purposes, then you will need to declare this to your insurer.

What about fuel for company cars?

Some employers may also pay for your fuel, for both business and personal use. In the same way that a company car would be considered a taxable benefit, this could also qualify. 

The amount of tax you might have to pay depends on your BiK rate multiplied by a flat rate determined by HMRC, which for the tax year 2021/22 is set at £24,600.

For example, if your company car had a BiK of 37%, then the taxable amount applied to £24,600 will be £9,102. If you pay 20% income tax, you will pay around £1,800 in taxes on that fuel.

The benefits of having a company car

No financial ties

The employee is not personally bound by the financial contract of leasing a car through the company. The employer must ensure that monthly payments, as well as maintenance, servicing and MOTs, are made on time. 

No financial surprises

The employer usually covers insurance, servicing and/or maintenance. Additionally, some companies may have a company car fuel benefit, which could be cheaper than filling up yourself, since your employer will do it for you and charge you a flat rate like BiK tax. 

Low Benefit-in-Kind (BIK) rates

The Benefit-in-Kind tax rate (BIK) is generally a small percentage of the vehicle's price. Pick an electric car or a hybrid car for the lowest BiK rates.

Motivation for employees

Providing company cars to your employees is an excellent way to show your appreciation for their hard work and set an example for new hires.

Why should you lease a company car?

Better vehicle

With company car leasing, you can drive away with a higher class vehicle for less money. The reason is that you do not need to pay the whole vehicle price upfront, and you can also take advantage of our special offers. 

No depreciation

Since you or your employer do not own the vehicle, leasing avoids the burden of depreciation. Once the lease period is over, you can choose to order a new lease car or walk away without having to sell your car. 

Drive a brand new car

You will always drive one of the latest vehicles on the market since company cars are usually changed every two to four years. As a result, you will have access to the latest in-vehicle technology and safety features.

Potential disadvantages of having a company car

Limited vehicle options

Some businesses have limitations or restrictions that may prevent you from choosing the car you want. It may lead to your disappointment with the model that is selected for you by your employer if you know what you want.

Company car tax

If your income is high or you own a car with high CO2 emissions, your BIK tax rates may be high.

The car is never yours

The car remains with the employer if you leave your job, so you are at risk of being left without a car. Lease agreements do not have an option to purchase the vehicle, so the vehicle must be returned at the end of the lease period.

Increased liability

The employee and/or the employer are liable for incidents and damage all the time if they use company vehicles for personal use. When the company vehicle is involved in an accident, it can become very costly. It is because the vehicle is the entire responsibility of the lessee.

 

Would you like to know more about company cars or business car leasing? Get in touch with one of our car lease specialists by calling 01424 863456 or click the button below to request a callback. 

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