How to calculate your company car tax

Choosing the Right Company Car: Navigating the Tax Terrain

Selecting a new set of wheels is rarely a straightforward process, and this decision-making becomes even more intricate when you’re a company car driver, as it has a direct impact on your tax obligations.

If your employer furnishes you with a car for business purposes and you’re allowed to use it beyond working hours (including your daily commute), the UK’s HMRC categorizes this as a benefit-in-kind (BIK).

The term “benefit-in-kind” encompasses any workplace perk given in addition to your salary, and these perks are also subject to taxation.

Decoding the Company Car Tax Framework

For many drivers, the process flows seamlessly. Typically, company car tax is deducted from your monthly wages as a BIK payment, sparing you from a hefty year-end bill. Nevertheless, the size of this monthly deduction can vary significantly.

Each company car possesses a taxable value specific to that vehicle. This value is calculated as a percentage of the list price (or P11D value), adjusted based on the car’s tailpipe CO2 emissions, and, in the case of plug-in hybrids (PHEVs), its electric-only driving range.

The list price encompasses optional add-ons, VAT, and delivery charges but excludes the registration fee or the first year of vehicle excise duty (VED), commonly referred to as road tax. Importantly, the list price remains fixed throughout the car’s lifespan, not reflecting any discounts applicable to new or used vehicles.

The BIK is paid as a percentage of the taxable value, aligned with your income tax bracket (20%, 40%, or 45%, with different rates for Scotland). This annual figure is then evenly distributed across your paychecks.

For instance, an individual in the 20% income tax bracket would be accountable for 20% of the car’s taxable value annually.

It’s worth noting that the lower the car’s cost and the less CO2 it emits, the lower your resulting tax liability will be.

Determining Your Company Car’s Tax Band

The starting point in this journey involves ascertaining the level of CO2 emissions produced by your car. In the case of a PHEV, it also entails knowing the electric-only range. This data should be available from your fleet manager or the vehicle supplier.

In 2017, manufacturers adopted a more detailed and rigorous economy test cycle. Consequently, both CO2 emissions and electric-only range figures are influenced by factors such as larger wheels, sporty bodykits, and even panoramic sunroofs. These variables can sometimes place certain models in multiple tax bands, underscoring the need for careful verification.

Navigating Tax Implications for Company Car Choices

Selecting the perfect company car involves not just aesthetic and performance considerations, but also careful evaluation of tax implications. Let’s delve into the critical factors to bear in mind while making this decision.

1. CO2 Emissions and Tax Bands

The core principle behind the UK’s company car tax system is to encourage the adoption of environmentally friendly vehicles. This incentive structure has evolved over the years to prioritize low emissions.

Each tax year, company car tax bands are revised, and the calculation relies heavily on CO2 emissions. The lower the emissions, the more favorable the tax treatment. This has given rise to the popularity of plug-in hybrids (PHEVs) and electric vehicles (EVs) among company car drivers.

Before settling on a car model, it’s essential to understand where it stands in terms of CO2 emissions and the corresponding tax band. Opting for a car with lower emissions not only reduces your tax liability but also contributes positively to the environment.

2. Electric and Plug-In Hybrid Vehicles

The recent surge in interest and advancements in electric and plug-in hybrid vehicles has significantly impacted the company car landscape. These vehicles offer not only reduced emissions but also potential cost savings through lower tax burdens.

Fully electric vehicles, with zero tailpipe emissions, often fall into the lowest tax bands. This translates to minimal tax liability for drivers, making them an attractive choice both environmentally and financially. Plug-in hybrid vehicles, which combine an electric motor with a conventional engine, also offer tax advantages, particularly if they have an extended electric-only range.

When considering an electric or plug-in hybrid car, it’s crucial to examine its electric-only driving range. A longer range means more miles can be covered without any emissions, leading to better tax treatment.

3. Balancing Cost and Tax Implications

While tax considerations are significant, they shouldn’t overshadow the overall cost of the vehicle. It’s essential to strike a balance between the initial cost of the car, its operating expenses, and the associated tax liability.

A more expensive car might fall into a higher tax band, resulting in a larger BIK payment. However, if the vehicle’s running costs are significantly lower due to better fuel efficiency or electric power, it could offset the higher tax payments. Conducting a comprehensive cost analysis over the car’s expected lifespan can help you make an informed decision.

4. Future-Proofing Your Choice

The landscape of automotive technology is rapidly evolving. As governments worldwide intensify efforts to reduce carbon emissions, regulations surrounding vehicle emissions are likely to become stricter. This could impact tax bands and incentives for different types of vehicles.

Opting for a car with lower emissions now not only ensures favorable tax treatment in the present but also positions you well for potential future changes in regulations. Investing in an environmentally friendly vehicle today could save you from the headache of navigating higher taxes in the years to come.

5. Seek Expert Advice

Navigating the intricacies of company car tax can be daunting, especially as tax regulations are subject to change. Seeking advice from tax professionals or financial advisors can provide valuable insights into how your choice of car aligns with your financial goals and tax planning.

Additionally, your employer’s HR department or fleet management team can offer guidance on the tax implications of specific vehicle choices. Collaborating with experts in the field ensures that you make an informed decision that aligns with both your personal preferences and financial well-being.

Final Thoughts: Driving Toward a Tax-Efficient Choice

Choosing the ideal company car involves more than just considering its appearance and performance. The tax implications associated with your choice can significantly impact your overall financial picture. By understanding the nuances of company car taxation, considering factors like CO2 emissions, electric options, cost, and future regulatory changes, you can navigate the terrain of company car choices more effectively. Remember, seeking advice from experts and leveraging available resources will empower you to make a decision that not only suits your driving needs but also optimizes your tax situation.