Knowledge

Taxation of Company Cars

Posted on Jan 17th, 2018 | Tax

A company car is any vehicle (car, van or motorcycle) which is leased or given to employees by a business. They can use it for both business and personal travel.

Background

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, which is also known as the benefit in kind cash value, is used to calculate the amount of Income Tax the employee owes HMRC and how much National Insurance contribution the employer owes HMRC.

Tax applied to company cars

The benefit in kind cash value is calculated using a number of variables, including the manufacturer’s list price. The fuel type and carbon dioxide emissions (CO2) are also considered and these two amounts make up the benefit in kind percentage which is published by HMRC every tax year according to the vehicle’s emissions. Each year, HMRC adds 3% to the benefit in kind percentage if the vehicle uses diesel fuel. The overall calculation provides a cash value for the benefit in kind which is included on the employee’s P11D form each tax year.

List Price of Vehicle x BIK percentage = BIK cash value

The government wants to encourage low-emission vehicles and for this reason, the benefit in kind percentage is reduced for vehicles with low and ultra-low emissions. For the 2017/18 tax year, HMRC published the benefit in kind percentage for these vehicles at 9% (increased from 7% in 2016/17), though this is planned to increase significantly to 16% for the 2019/20 tax year.

Manufacturer’s list price

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 they 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, its list price increase will still apply for the whole tax year.

If you make any additional accessory modifications after delivery, which is 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.

Calculating the tax liability for a company vehicle

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 2016/17 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 (diesel) £20,385 112 22%1 £4,485 £619 £897
Nissan Leaf (electric) £26,490 0 7% £1,854 £256 £371

1 19% plus 3% supplement for diesel fuel

BIK rates 2016/17 tax year and beyond

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.

Main table of benefit in kind rates
Emissions (g/km) 2016/17 2017/18 2018/19 2019/20
Zero 7% 9% 13% 16%
1 – 50
51 – 75 11% 13% 16% 19%
76 – 79 15% 17% 19% 22%
80 15% 17% 19% 22%
85 15% 17% 19% 22%
90 15% 17% 19% 22%
95 16% 18% 20% 23%
100 17% 19% 21% 24%
105 18% 20% 22% 25%
110 19% 21% 23% 26%
115 20% 22% 24% 27%
120 21% 23% 25% 28%
125 22% 24% 26% 29%
And then in increments of 5g = 1% until
160 29% 31% 33% 36%
165 30% 32% 34% 37%
170 31% 33% 35% 37%
175 32% 34% 36% 37%
180 33% 35% 37% 37%
185 34% 36% 37% 37%
190 35% 37% 37% 37%
195 36% 37% 37% 37%
200 37% 37% 37% 37%
205 37% 37% 37% 37%
210 and above 37% 37% 37% 37%

Looking to the future

HMRC has published the plans for benefit in kind rates from 6 April 2020:

Car Benefit Changes to 2020/21
CO2 g/km 0% Range (miles) % of list price
Zero N/A 2%
1 – 50g > 130 miles 2%
70 – 129 5%
40 – 69 8%
30 – 39 12%
< 30 miles 14%
51 – 54g N/A 15%
Then each 5g +1%
Maximum at 160g + 37%

Is it worth having a low or ultra-low emission company car?

For companies that are run and managed by the same person, or companies with only a few 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 claiming mileage related business travel here.

For Crunch clients 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 lots 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 two vehicles from our earlier example for the 2016/17 and 2019/20 tax years and how this is proposed to be 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) £20,385 112 £4,485 £5,9121 32%
Nissan Leaf (electric) £26,490 0 £1,854 £4,2382 129%

1£20,385 x 29% (includes 3% supplement for diesel fuel) = £5,912

2£26,490 x 16% = £4,238

Conclusion

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.

Where can I get more help?

If you’ve got questions about tax and how it affects you or your business, maybe you need support from an accountant?

At Crunch we offer a complete online accounting service. Get simple online accounting software, unlimited access to advice from expert accountants, and your very own client manager.

It’s everything you need to be in control of your business finances. And all from just £29.50 per month. You can call us on 0333 311 8000 or you can book a callback. We’ll be happy to discuss how we can help you.

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Written by Jake Smith

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