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Taxation of company cars

Posted by Jake Smith on Feb 17th, 2020 | Tax

Company car park | Taxation of Company Cars | Crunch

A company car is any vehicle (car, van or motorcycle) which is provided to employees by a business. An employee can use the vehicle for business and personal travel.

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Some businesses include a company car as part of the overall remuneration package for their employees. However, HMRC considers the private use of a company car to be a benefit in kind and is, therefore, taxed as part of the employee’s overall income from employment. The value of the company car benefit in kind (BiK) which is also known as the BiK cash value, is used to calculate the amount of Income Tax the employee must pay and the National Insurance contributions the employer makes to HMRC.

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The BiK cash value is calculated using a number of variables, starting with the manufacturer’s list price for the vehicle. The fuel type and carbon dioxide emissions (CO2) are also considered and these determine the BiK percentage which is published by HMRC every tax year. Each tax year, HMRC also adds 4% to the BiK percentage based on other emission factors such as if the vehicle uses diesel fuel (unless it meets the RDE2 standards or is a plug-in hybrid).

The overall BiK calculation provides a cash value for the individual vehicle which is included on the employee’s P11D form each tax year. The maximum amount the BiK value can be is 37% of the vehicle list price.

List Price of Vehicle x BIK percentage = BIK cash value

The government wants to encourage electric and ultra-low-emission vehicles and for this reason, the BiK percentage is reduced for vehicles with low and ultra-low emissions. For the 2020/21 tax year, HMRC has announced new lower rates for zero, low and ultra-low emission vehicles.

The list price includes the manufacturer’s standard accessories for the vehicle, number plates, and its delivery, with VAT added. Any optional extras, such as metallic paint or higher specification wheels, regardless of the cost, must also be included in the list price.

If any modifications are made to the vehicle, such as fitting an enhanced multimedia system which wasn’t provided by the manufacturer, then these must also be added to the list price, even if the modification is made after its delivery. If any modifications are made in the middle of the tax year, the list price increase will still apply for the whole tax year.

If you make any additional accessory modifications after delivery, which are worth less than £100, then you don’t need to add them to the list price. In contrast, if the accessory was included by the manufacturer before the car was delivered, the cost is included in the list price.

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The following example shows the tax liabilities for employers and their employees for a diesel car and an electric car using the manufacturer’s list price and the BIK percentage published by HMRC for the 2019/20 tax year:

Vehicle List price CO2 (g/km) BIK % BIK Cash value Employers NIC Employee’s income tax
Source Manufacturer HMRC tax tables Calculated 13.8% 20%
Seat Leon ST (diesel) £25,230 112 30%1 £7,569 £1,045 £1514
Seat Leon SC (petrol) £24,235 112 26% £6,301 £870 £1,260
Nissan Leaf (electric) £26,490 0 16% £4,238 £585 £848

1 26% plus 4% supplement for diesel fuel

Check out our tax rates and thresholds article for more information on income tax rates.

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HMRC publishes the benefit in kind rates every year, along with plans for the future. By June 2017, HMRC has published the amounts for the current tax year and beyond.

Cars registered before 6th April 2020.

These should use the older NEDC emissions figures in calculations

Main table of benefit in kind rates (BiK percentage)* 
Emissions (g/km) N/A 2020/21 2021/22 2022/23
Zero N/A 0% 1% 2%
1 – 50 > 130 miles 2% 2% 2%
1 – 50 70 – 129 miles 5% 5% 5%
1 – 50 40 – 69 miles 8% 8% 8%
1 – 50 30 – 39 miles 12% 12% 12%
1 – 50 <30 miles 14% 14% 14%
51 – 54 N/A 15% 15% 15%
55 – 59 N/A 16% 16% 16%
60 – 64 N/A 17% 17% 17%
65 – 69 N/A 18% 18% 18%
70 – 74 N/A 19% 19% 19%
75 – 79 N/A 20% 20% 20%
80 – 84 N/A 21% 21% 21%
85 – 89 N/A 22% 22% 22%
90 – 94 N/A 23% 23% 23%
95 – 99 N/A 24% 24% 24%
100 – 104 N/A 25% 25% 25%
105 -109 N/A 26% 26% 26%
110 – 114 N/A 27% 27% 27%
115 – 119 N/A 28% 28% 28%
120 – 124 N/A 29% 29% 29%
125 – 129 N/A 30% 30% 30%
130 – 134 N/A 31% 31% 31%
135 – 139 N/A 32% 32% 32%
140 – 144 N/A 33% 33% 33%
145 – 149 N/A 34% 34% 34%
150 – 154 N/A 35% 35% 35%
155 – 159 N/A 36% 36% 36%
160 – 164 N/A 37% 37% 37%

*Add 4% up to a maximum of 37% for diesel cars that are not certified to the Real Driving Emissions 2 (RDE2) standard. Add 0% for diesel cars which are certified to the RDE2 standard.

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The government has announced different rates for cars registered after 6th April 2020. These cars need to use the updated WLTP emissions figures, which are generally higher than the old rates.

Main table of benefit in kind rates (BiK percentage)* 
Emissions (g/km) N/A 2020/21 2021/22 2022/23
Zero N/A 0% 1% 2%
1 – 50 > 130 miles 0% 1% 2%
1 – 50 70 – 129 miles 3% 4% 5%
1 – 50 40 – 69 miles 6% 7% 8%
1 – 50 30 – 39 miles 10% 11% 12%
1 – 50 <30 miles 12% 13% 14%
51 – 54 N/A 13% 14% 15%
55 – 59 N/A 14% 15% 16%
60 – 64 N/A 15% 16% 17%
65 – 69 N/A 16% 17% 18%
70 – 74 N/A 17% 18% 19%
75 – 79 N/A 18% 19% 20%
80 – 84 N/A 19% 20% 21%
85 – 89 N/A 20% 21% 22%
90 – 94 N/A 21% 22% 23%
95 – 99 N/A 22% 23% 24%
100 – 104 N/A 23% 24% 25%
105 -109 N/A 24% 25% 26%
110 – 114 N/A 25% 26% 27%
115 – 119 N/A 26% 27% 28%
120 – 124 N/A 27% 28% 29%
125 – 129 N/A 28% 29% 30%
130 – 134 N/A 29% 30% 31%
135 – 139 N/A 30% 31% 32%
140 – 144 N/A 31% 32% 33%
145 – 149 N/A 32% 33% 34%
150 – 154 N/A 33% 34% 35%
155 – 159 N/A 34% 35% 36%
160 – 164 N/A 35% 36% 37%
165 – 169 N/A 36% 37% 37%
170 or more N/A 37% 37% 37%

*Add 4% up to a maximum of 37% for diesel cars that are not certified to the Real Driving Emissions 2 (RDE2) standard. Add 0% for diesel cars which are certified to the RDE2 standard. Diesel plug-in hybrids are exempt, as they’re classed as alternative-fuel vehicles.

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For companies with a sole Director and Shareholder, or companies with a small number of employees, it might not be tax efficient to offer a company car. Sometimes claiming mileage for business-related travel is a better option. Crunch clients can find out more about how to record and claim mileage related business travel in their Crunch account here.

Our article on company cars can give you a little extra information on whether it’s better for you to choose a company car or to opt for mileage.

For businesses with a higher number of employees, a company car might be necessary because of the employee’s role, such as sales. In this case, it’s wise to consider the fuel type of the vehicle offered to see if it’s for a low or ultra-low emission vehicle.

The tax advantages of providing low or ultra-low emission vehicles are, however, diminishing. The table below shows the benefit in kind cash value of the vehicles from our earlier example for the 2017/18 and 2019/20 tax years and how this has increased.

Car List price CO2 (g/km) 2016/17 BiK Cash value 2019/20 BiK Cash value % Increase in BiK Cash value
Seat Leon (diesel) £25,230 112 £6,055 £7,5691 25%
Seat Leon (petrol) £24,235 112 £5,089 £6,301 24%
Nissan Leaf (electric) £26,490 0 £2,384 £4,328 78%

1includes 4% supplement for diesel fuel
If the Company pays for fuel for private use

A director/employee who is provided with a company car and also receives free fuel from his employer is taxed on the cash equivalent value of the benefit each tax year. The cash equivalent amount is fixed each year and increased to £24,500 (from £24,100) on 6th April 2020.

The BiK charge is calculated by using an appropriate percentage, which is the same as the rate for company car benefit purposes (see above) and then multiplying by the fixed amount of £24,500 in 2020/21 (up from £24,000 in 2019/20). So if the BiK percentage for your company car is 13%, your BiK amount on the fuel provided for personal use is £3,185 (13% of £24,500).

If you’re provided with a Company Van that is available for private use, then this is treated as a Benefit in Kind and is reported on your P11D. If your company also pays for any fuel for private use this also gets reported as a benefit in Kind on your P11D.

For the 2021 tax year, The BiK on company vans increases to £3,490 (from £3,430) .

BiK on fuel for a van provided for personal use increases to £666 (from £655).

It’s important to consider different options when deciding to offer or take a company car.  What was once regarded as a perk of the job has been firmly in HMRC’s sights to increase its tax revenues for the last 15 years.  It’s a good idea to seek advice from your accountant in deciding the best option for your company and personal tax circumstances. If you are a Crunch customer please speak to your client manager.

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