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Company Car Tax – A 2020 Guide

The company car has been offered as part of job package for many years. It is viewed as a bonus on top of your salary and a way business can ensure employees arrive to meet clients in a reliable and presentable motor vehicle.

Company Cars

It is likely a company car will be replaced every few years, meaning an MOT by a garage mechanic won’t be necessary, all repairs and servicing required may also be included. Many companies will offer a choice of vehicles from the same manufacturer.

Company car contracts with large companies can be big business for vehicle lease hire and the motor trade. While the benefit of climbing the ladder at work usually means an increase in salary with the range of cars offered being correspondingly more luxurious.

In most cases the car can also be used for leisure purposes, so when deciding on the model, it’s important to factor in your lifestyle, types of journey you make, and the size of your family.

You should also consider that you will still be responsible for some of the running costs. These will certainly include personal tax, private millage fuel, an insurance policy or road recovery insurance.

Company cars are taxed in a different way to private vehicles – under a scheme called ‘Benefit In Kind’ tax (BIK), new tax bands for the 2020/2021 tax year came into force in April 2020.

Like the road tax paid by motorists, BIK tax bands take into account a car’s emissions of carbon dioxide and nitrogen oxide, higher tax bands are for cars with the highest emission levels. In addition, BIK tax varies with the salary you are paid with high earners contributing more tax.

For the 2020/2021 tax year, the emissions criteria for the different tax bands are based on the ‘World Harmonised Light Vehicle Test Procedure’ (WLTP), test standard for emissions and fuel economy.

Previously, the test used was the ‘New European Driving Cycle’ (NEDC). The new tax bands increase the advantages of picking an electric or hybrid vehicle, while increasing the rates paid by drivers of diesel and petrol cars, especially larger models that consume more fuel.

Fully electric company cars previously taxed at a rate of 16% drop to zero, making this an excellent choice for urban travel.

Those whose salary puts them in the higher tax bracket could save over £2,000 in tax annually. However, this rate will rise to 1%, and then 2% over the next two tax years.

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Plug in hybrids also enjoy a decrease in tax, with the exact amount dependent on the distance that can be travelled only under electric power, and the CO2 emissions.

Diesel cars continue to be taxed at a higher rate than petrol models, with the exception of diesel hybrids which are classed as alternative fuel vehicles, and those diesel models that pass the ‘Real Driving Emissions Step 2’, part of the WLTP.

WLTP results place some cars in a higher emission bracket than they were previously as they are designed to be more accurate than the NEDC.

There is a dispensation for models that attract a higher cost under the new WLTP than they did when previously tested under the NEDC, with a slight reduction in tax for the current tax year, but this will disappear over the next two years, creating an incentive to switch to a more environmentally friendly vehicle, great news for the motor trade.

Whether it’s a new company car as part of a job package, or time to upgrade your existing company vehicle, it’s well worth taking a look at the BIK tax bands to see how much tax you’ll be paying for your new ride.